Paying income taxes is something a lot of us never really stop to think about. While working, a certain amount gets taken out of each paycheck (called a “withholding”) to pay the taxes we expect to owe. These withholdings end up being enough to satisfy our income tax liability until tax season rolls around–at which time we either pay more in or get some money back when we file our tax returns.

But for retirees who no longer receive a regular paycheck, paying taxes is a different experience. Instead of withholding income from a paycheck, they’re likely forced to cut a check and pay an estimated tax payment to the government every few months in order to avoid underpayment penalties.

Remembering to make these payments can be a hassle when you’re too busy enjoying your retirement. But if you’re not receiving a regular paycheck, how are you supposed to withhold anything for income tax purposes? Well, just because you’re not getting regular paychecks doesn’t mean you aren’t still receiving income. To find the answer, you have to look to your retirement accounts.

A Brief Overview of Estimated Tax Payments

The United States tax system is a “pay as you go” system which simply means that tax is paid on your income as you earn it. Again, for most people working and earning a steady income, this just means that a portion of your paycheck is withheld and contributed toward your income tax liability.

However, this isn’t always the case. There are instances where people earning an income don’t have taxes removed at the time that they earn it, so to square up with the IRS, these people must make estimated tax payments.

As the name suggests, estimated tax payments are payments made to the government to cover your estimated income tax liability. Estimated tax payments offer a little bit of wiggle room with how they’re paid, as the amount you pay doesn’t need to be exactly the amount you may owe (hence the “estimated” part). Also, they only need to be paid roughly every quarter, so if, for example, you’re an independent contractor earning a weekly paycheck, you don’t need to make an estimated tax payment every week; you only need to make them by certain deadlines every few months.

Figuring out how much you owe per estimated tax payment requires a little bit of math, but it’s typically not too difficult. Basically, there are two ways to calculate your estimated tax payments: 100% of the previous year’s tax liability (or 110% if your adjusted gross income (AGI) exceeded $150,000) or 90% of the current year’s tax liability.

For example, let’s say you had an AGI of $120,000 last year and had a tax liability of $24,000. If you choose to make your payments using 100% of the previous year’s tax liability (the simpler of the two calculations), for the year, your estimated tax payments would have to equal $24,000. Since you must make four of these payments, each payment would equal $6,000.

Come tax season, any differences between estimated tax paid and actual tax owed would get resolved when you file your tax return.

Avoiding an Estimated Tax Penalty

Failure to make your estimated tax payment could result in having to pay an estimated tax penalty. Hearing the words “tax” and “penalty” in the same sentence will likely send a shiver down your spine, but these aren’t actually that bad. Still, you’ll want to avoid them if you can because they take money out of your pocket and put it into Uncle Sam’s.

Estimated tax penalties are equal to the federal short-term rate applicable during the first month of the quarter, plus 3%. For example, if the federal short-term rate at the time you need to make a payment is 0.15%, then the penalty you owe will be 3.15% of the estimated tax payment you were supposed to make.

Withholding from Retirement Accounts to Make Estimated Tax Payments

Not only can it be a hassle to calculate what you owe for estimated tax payments, but even remembering to make them can also be a burden. That’s why making these payments by withholding money from a paycheck is usually the preferred method. But what if you don’t have a paycheck? That’s where your retirement accounts come into play.

Retirees can withhold portions–or even 100%–of distributions from qualified retirement accounts like 401(k)s, 403(b)s and IRAs to cover these income tax payments. By withholding from your retirement accounts to cover your income tax liability, you can eliminate the need to ever make one of these payments.

Additionally, withholding from your retirement accounts can offer some flexibility with how you cover this tax liability. Going back to our previous example, let’s say you have an estimated income tax liability of $24,000 for the year, and you also have to take required minimum distributions (RMDs) from your retirement accounts to the tune of $60,000. While you could use the money from those RMDs to cut four separate $6,000 checks, you could also take four RMDs throughout the year, each one equaling $15,000, and then withhold 40% ($6,000) from each distribution. Or, you could put off taking RMDs until the end of the year and collect your $60,000 in one lump sum, at which point your withholding of 40% equals the full $24,000 amount of your tax liability. Conversely, you could take several smaller RMDs throughout the year and withhold a smaller amount–sort of like a paycheck–or withhold different percentages from each RMD.

When withholding from RMDs, you have this flexibility with how much you withhold and how often. As long as you pay your full estimated tax liability within the year it’s due, you will avoid having to pay an estimated tax penalty.

You might even find that waiting until the end of the year to take your RMD and make your tax payment is the optimal strategy. Say the money in your 401(k) is growing at a 5% rate of return. By holding off on your RMD until the end of the year, you give that money more time to grow, so when it’s time to take your distribution, you’ll actually have more money in your account than if you had taken the same amount in smaller chunks throughout the year.

When Withholding from Retirement Accounts Isn’t the Best Idea

It’s generally not a smart move to dig into your retirement accounts before you have to, as this can come with additional taxes and penalties. If you’re earning income from other sources, those should be your first choices when looking to withhold for tax purposes.

That’s because the money in your retirement accounts has the opportunity to grow in ways that regular income does not. While keeping your money in an IRA or 401(k) certainly does not guarantee growth, it does offer that chance, so leaving your money in those accounts is generally thought to be the wiser move.

As a retiree, you may also rely on your RMDs to pay for lifestyle or health care expenses. If this is the case, you might not be able to afford to push off RMDs until the end of the year. You may need to take those distributions earlier or even several times throughout the year. It’s possible you could even find yourself in a situation where you withhold from some distributions but not others so that you can still afford to pay for your various expenses.

Paying our income tax liability is one of those things we rarely think much about, but it’s important to know your options. Work with your financial advisor to determine the best way for you to make your estimated tax payments and if withholding from your retirement accounts is right for you.