What Happens if I Withdraw Funds Early, and How Does It Affect My Retirement Strategy?
When an unexpected expense comes up, the money in a retirement account can feel like an available solution. Before taking an early withdrawal, however, it is important to understand that the true cost may be greater than the amount you withdraw.
Generally, withdrawals from a retirement account before age 59½ are considered early distributions. Depending on the type of account, the distribution may be subject to ordinary income tax and an additional 10% federal tax. State taxes may also apply. Withdrawals from a SIMPLE IRA during the participant’s first two years may be subject to a 25% additional tax instead of 10%.
For example, withdrawing $20,000 from a traditional IRA or 401(k) does not necessarily mean you will have the full $20,000 available to spend. After federal and state taxes and any additional tax are considered, the amount you keep could be significantly lower.
The tax impact is only part of the cost. An early withdrawal also removes money that could have continued growing over time. You lose both the amount withdrawn and the potential growth it could have earned. The further you are from retirement, the greater that long-term impact may be.
Taking money out early may mean you need to increase future contributions, delay retirement, or adjust your expected retirement income. In most cases, you also cannot simply replace the entire amount later because annual contribution limits still apply.
The tax rules depend on the type of retirement account. Distributions from traditional IRAs and traditional 401(k)s are generally included in taxable income. Roth IRAs are treated differently. Because regular Roth IRA contributions are made with after-tax dollars, those contributions can generally be withdrawn without income tax or the additional 10% tax. Roth conversions and earnings follow different rules, so the tax treatment depends on what funds are being withdrawn and how long they have been in the account.
There are exceptions to the additional tax for certain situations, but the available exceptions vary by account type. For example, exceptions for qualified higher education expenses and a first-time home purchase generally apply to IRAs, not 401(k) plans. The first-time-homebuyer exception also has a $10,000 lifetime limit. Other exceptions may apply for certain medical expenses, disability, birth or adoption expenses, and qualifying emergency expenses. Even
when an exception removes the additional tax, the distribution may still be included in taxable income.
Before withdrawing funds, review the tax consequences and consider whether other available options could meet your immediate needs. Some employer-sponsored retirement plans may offer loans, but those loans come with their own requirements and risks. If you leave your employer or fail to follow the repayment schedule, the remaining balance could be treated as a taxable distribution. IRAs do not allow participant loans.
Taking an early withdrawal is not always the wrong decision, especially during a financial emergency. However, it is important to understand the potential tax consequences before moving forward. A tax professional can help you determine whether the withdrawal will be taxable, whether an exception to the additional tax may apply, and how the additional income could affect your overall tax situation. For questions about replacing the funds or adjusting your long-term retirement plan, consider consulting a financial advisor.
What happens if I miss a quarterly estimated tax installment?
In most cases, the best next step is to make the installment as soon as possible.Estimated taxes are part of the federal pay-as-you-go tax system.
If you earn income that does not have enough tax withheld, such as self-employment, freelance, rental, investment, or certain business income, you may need to make estimated tax installments throughout the year. If you do not pay enough tax on time, you could be subject to an underpayment penalty.
One thing that sometimes surprises taxpayers is that simply catching up with a larger installment later does not necessarily erase the issue. Because estimated taxes are generally evaluated based on when installments were due, a late installment may still result in a penalty for the period it was unpaid. The sooner you make up the missed installment, however, the sooner you can stop that potential underpayment from continuing to grow.
There are also safe harbor rules that may help you avoid an underpayment penalty, even if you owe additional tax when you file. Generally, you may be protected if you have paid enough during the year based on your current-year tax or a percentage of your prior-year tax, depending on your circumstances. For taxpayers whose income is uneven throughout the year, the annualized income installment method may also help. Instead of assuming income was earned evenly throughout the year, this method looks at when income was actually received and may reduce or eliminate a penalty when more of your income was earned later in the year.
It is also important to look at why you missed the installment. If your income has increased, your business is having a stronger year than expected, or you recently received a large amount of income without withholding, your original estimated installments may no longer be enough. On the other hand, if your income varies throughout the year, the amount you need to pay each quarter may not be as simple as dividing your expected annual tax bill into four equal installments.
That is where a quick tax check-in can make a big difference. Rather than just making the missed installment and moving on, it may be a good time to review your year-to-date income, withholding, and estimated tax installments to see whether the rest of your schedule needs to be adjusted.
The key is not to panic over a missed quarterly installment, but not to ignore it either. Addressing it quickly and reviewing the bigger picture, including whether a safe harbor or annualized income method applies, can help minimize potential penalties, prevent another surprise, and keep your tax plan on track for the rest of the year.
What documents should I start gathering now to make year-end planning easier?
One of the biggest misconceptions I see is that tax planning starts in the new year, right before you file your tax return. In reality, many of the best tax-saving opportunities happen before December 31. That's why it's worth gathering your financial documents now. The sooner your advisor has a complete picture of your year, the more opportunities you'll have to identify strategies before the year ends.
A good place to start is by gathering documents that tell the full story of your financial year. That includes your most recent pay stubs, records of estimated tax payments, investment statements, retirement account contributions, and documentation for any major financial changes like buying or selling property, starting a business, or receiving an inheritance.
If you're a business owner, now is also a great time to organize your year-to-date profit and loss statement, balance sheet, payroll records, and receipts for major purchases or equipment. Having those documents ready allows your tax advisor to identify planning opportunities while there's still time to act. Don't forget about deductible expenses. Gather records for charitable donations, medical expenses, education costs, business mileage, and any home office expenses if they apply to your situation. Even if some of these don't ultimately affect your return, having them organized makes the planning process much smoother. Just as important as gathering documents is thinking about what has changed this year. Did you get married? Welcome a child?
Change jobs? Start investing? Sell a business or rental property? Life changes often create tax planning opportunities, but only if your advisor knows about them before year-end. At Abacus!, we believe tax planning is about being proactive, not reactive. The more information you can organize before the calendar turns, the more time we have to help you identify strategies, avoid surprises, and make informed decisions. A little preparation today can make tax season much less stressful and potentially much more beneficial.
Can I Use Cost Segregation for Renovations on an Existing Property, or Is It Only for New Construction?
This is a great question and the good news is that cost segregation is not just for new construction. Cost segregations are a great opportunity to explore for new construction, but existing properties may provide similar tax savings. Cost segregations can also apply to renovations, remodels, build-outs, and improvements made to an existing rental or business property.
Think of cost segregation as taking a closer look at where your money went during a project. When you renovate a property, not every dollar is treated the same for tax purposes. Some costs are tied to the building itself, while others may be connected to items that can be written off over a shorter period of time.
For example, a renovation might include things like new flooring, lighting, appliances, cabinetry, parking lot improvements, fencing, landscaping, or specialty electrical work. Depending on the project, some of those items may qualify for faster depreciation, which can create tax savings sooner rather than spreading everything out over many years.
This can be especially helpful for property owners who have invested a significant amount into improving a rental property, office, retail space, restaurant, warehouse, or other business property. Even if you did not just buy the building, the improvements you make may still create opportunities for tax planning.
One important thing to understand is that renovations should be reviewed carefully. Some costs may count as repairs, while others may be considered improvements. That difference matters because it affects how and when you can deduct the expense. This is where working with a tax professional can make a big difference.
The best time to talk about cost segregation is before or during a renovation, not after everything is finished. Keeping detailed invoices, contractor agreements, project descriptions, and records of when the work was completed can make the process much smoother.
At Abacus!, we often remind clients that cost segregation is not just a “new construction” strategy. If you are putting money into an existing property, it may be worth taking a closer look at whether those improvements can work harder for you from a tax standpoint.
Do I need to make quarterly estimated tax payments?
Estimated tax payments are not just for full-time business owners. They may apply to anyone who earns income that does not have enough tax withheld during the year.
The U.S. tax system is pay-as-you-go, which means tax generally must be paid as income is earned. For many employees, this happens through payroll withholding. But if you receive income from self-employment, freelance or gig work, rental properties, interest, dividends, capital gains, prizes, or passthrough business income, withholding may not be enough to cover your tax liability.
That is where estimated tax payments come in.
In general, individuals, including sole proprietors, partners, and S corporation shareholders, may need to make estimated tax payments if they expect to owe at least $1,000 for the year after subtracting withholding and refundable credits, and their withholding and refundable credits will be less than the smaller of 90% of current-year tax or 100% of prior-year tax, generally 110% for certain higher-income taxpayers.
For 2026, the estimated tax due dates for calendar-year taxpayers are April 15, June 15, September 15, and January 15, 2027. Although these payments are commonly called quarterly payments, the IRS divides the year into four payment periods that do not line up exactly with calendar quarters.
Estimated tax payments can be especially important if your income is uneven during the year. For example, business owners, real estate professionals, consultants, and investors may earn more in some parts of the year than others. In that case, you may be able to use the annualized income installment method instead of simply dividing the year's projected tax into four equal payments.
The key takeaway is this: estimated tax payments are part of the pay-as-you-go system. They help taxpayers stay current, manage cash flow, and reduce the risk of a large balance due or an underpayment penalty at filing time.
We help clients look at the full picture, including income, withholding, deductions, credits, and timing, so estimated payments are based on real numbers, not guesses. If you are unsure whether estimated tax payments apply to you, it is worth asking before the next deadline arrives.
What's the most important step to take after receiving an IRS notice?
Every tax season, and honestly, throughout the year, I hear a similar concern from clients: “I got a notice from the IRS… what did I do wrong?”
The short answer is: not necessarily anything. Receiving an IRS notice is more common than most people think, and in many cases, it’s simply a request for clarification or a correction, not a sign that you’re in serious trouble.
The most important step you can take is to read the notice carefully and respond in a timely manner.
I’ve seen situations where the issue itself was relatively minor, but it became more complicated because the notice was set aside or overlooked. The IRS always provides a deadline, and missing that window can lead to additional penalties, interest, or further correspondence
Start by reviewing the notice in full. Pay close attention to what tax year it relates to, what the IRS is proposing or requesting, and whether any action is required on your part. In some cases, the IRS may simply be informing you of a change they’ve already made. In others, they may be asking for documentation or a response.
From there, gather any relevant records: tax returns, W-2s, 1099s, receipts, or supporting documents. Having everything organized makes it much easier to respond accurately and confidently.
If the notice is straightforward, you may be able to handle it on your own. But if anything is unclear or feels more complex, working with a tax professional can help ensure the response is handled correctly and efficiently.
At Abacus!, we often remind clients that timely communication and accurate information go a long way in resolving tax matters smoothly. An IRS notice is not something to ignore, but it’s also not something to fear.
Handled properly, most notices can be resolved with minimal disruption.
Will Filing an Extension Increase My Chances of Penalties or an IRS Audit?
Every tax season, I hear the same concern from clients: “If I file an extension, will it increase my chances of getting penalized or audited by the IRS?” The short answer is no. Filing an extension by itself does not increase your risk of an audit, and it does not automatically lead to penalties.
In fact, extensions are very common. Millions of taxpayers request them every year for a variety of reasons—waiting on additional documents, dealing with complex financial situations, or simply needing more time to ensure their return is accurate. From the IRS’s perspective, filing an extension is simply using an option that is built into the tax system.
However, there is one important distinction to understand: an extension gives you more time to file, not more time to pay. If you expect to owe taxes, the IRS still requires payment by the original filing deadline. If you do not pay enough by that date, you may face interest or underpayment penalties on the remaining balance.
The good news is that these situations can often be managed with proper planning. Making a reasonable estimated payment when you file the extension can significantly reduce or eliminate potential penalties.
Another benefit of filing an extension is accuracy. Rushing to meet the deadline sometimes leads to mistakes, missing forms, or overlooked deductions. Taking a little extra time can actually help you file a more complete and accurate return—which is something both taxpayers and the IRS appreciate.
At Abacus!, we often remind clients that tax planning is about making thoughtful decisions, not rushing to meet a date on the calendar. If you need more time to get things right, filing an extension can be a smart and responsible step.
What Business Expenses Can I Deduct?
One of the easiest ways to lower your tax bill is by knowing which business expenses are deductible. The IRS says a business expense has to be ordinary and necessary—basically, common in your industry and helpful for running your business.
Common Deductible Expenses
• Rent and utilities: Office space, storage, or other facilities used for your business.
• Salaries, wages, and benefits: Pay for employees, plus health insurance and retirement contributions.
• Advertising and marketing: Everything from social media ads to business cards.
• Professional services: Accountants, lawyers, consultants, or tax prep services.
• Business travel and meals: Travel for clients or conferences, plus 50% of business meal costs.
• Vehicle expenses: Either mileage or actual vehicle costs when you use your car for business.
What the IRS Wants You to Know
• The expense must be both ordinary and necessary for your business.
• Personal or family expenses don’t count.
Keeping good records—like receipts, invoices, or mileage logs—not only makes tax time easier, it protects you if the IRS ever asks questions. At Abacus!, we always encourage clients to track everything throughout the year instead of scrambling at the last minute.
Claiming all the deductions you qualify for is one of the simplest ways to save on taxes. The key is organization, documentation, and knowing what counts. That’s where an accounting professional comes in—we help you make sure you don’t miss a thing.
Do I Need to Report Income if It Seems Minor or I Wasn’t Expecting a Tax Form?
It’s a common question we hear every tax season. “Do I really need to report this income? It was a small amount, or I didn’t even get a tax form for it.” The short answer is yes, in most cases, it still needs to be reported.
Here’s why and what to watch for.
All Income Is Taxable Unless the IRS Says Otherwise
The IRS requires taxpayers to report all income from all sources unless a specific exemption applies. The key thing to remember is that taxability does not depend on whether you receive a tax form or how small the amount may seem.
Even if the income feels minor, unexpected, or informal, it can still count.
Common Examples People Forget to Report
Some types of income often get overlooked because they do not always come with a W-2 or 1099.
These include:
- Side jobs, freelancing, or gig work
- Cash payments for services
- Online sales or marketplace income
- nterest or dividends from smaller accounts
- Referral bonuses or incentives
- Prizes, awards, or miscellaneous payments
If you received money or something of value, it is worth asking whether it should be included on your return.
“But It Was Only a Small Amount…”
There is no universal dollar threshold that makes income automatically non reportable. While very small amounts may not significantly impact your tax liability, failing to report income can still raise red flags, especially if the IRS receives a copy of a tax form you did not include.
Remember, the IRS often knows about income before you do, thanks to third party reporting.
What If You Didn’t Receive a Tax Form?
Tax forms are helpful, but they are not the deciding factor. You are still responsible for reporting income even if:
- A form was lost
- The payer did not issue one
- The amount was below the payer’s reporting threshold
Keeping good records throughout the year can make this much easier.
When in Doubt, Ask
If you are unsure whether something counts as income, it is always better to ask than assume. Reporting income correctly helps you:
● Avoid IRS notices or penalties
● Stay compliant and confident
● Build an accurate financial picture
If you are unsure how to handle a specific type of income, a tax professional can help you understand what needs to be reported and why.
What Should Be on My Checklist to Start the New Year Right?
You often hear people say “new year, new me” as a joke in passing, but as we head into 2026, I want to challenge you to actually put “new year, new me” into practice when it comes to tax preparation. The beginning of the year is an ideal time to be intentional about your finances and set yourself up for a smoother, less stressful tax season. One of the best practices I recommend is starting with a review of the prior year. Take a look at your income, expenses, and any major life changes—such as a new job, home purchase, or growing family—that could affect your tax situation. These changes often create opportunities for deductions, credits, or adjustments that are easier to address early rather than at filing time.
Another important step is gathering and organizing your key documents. This includes W-2s, 1099s, investment statements, and receipts for deductible expenses like charitable contributions, medical costs, and business expenses if you’re self-employed. Keeping these items organized throughout the year is a best practice that can save time, reduce errors, and help ensure you’re capturing every opportunity available to you. It’s also wise to review your withholding or estimated tax payments at the start of the year. Making adjustments now can help avoid underpayments or unexpected balances due later on.
The start of a new year is also a great opportunity to set a New Year’s resolution centered on tax planning. That might mean committing to track expenses monthly, increasing retirement contributions, or scheduling regular check-ins with a tax advisor. These small, consistent actions can have a meaningful impact over time. Finally, consider planning a mid-year tax review. Tax laws evolve, and life doesn’t stand still, so having a proactive plan allows you to adjust as needed and stay aligned with your financial goals. By creating an achievable, actionable New Year’s resolution focused on tax planning and following these best practices, you can move into 2026 feeling organized, confident, and prepared. Don’t wait for deadlines or surprises to force your hand. Start planning now and put a proactive tax strategy in place that works for you all year long.
The new Bingham Elementary School, along with plans to renovate and increase the size of Bissett Elementary, wasn’t part of the original list of projects encompassed by Proposition S, a $220 million bond issue by Springfield Public Schools approved by city voters in April 2023.
East Sunshine Street improvements to start Nov. 2
FTC, 20 states sue Dollar General
Data center definitions, delay bills debated at Springfield council
Ice cream novelty maker to close Brentwood operation, lay off 107
Poll: Who's got your vote for the District 30 seat in the state Senate?