The Free Financial Advisor

You are here: Home / Archives for taxes

IRS Opens 2027 Corporate Tax Compliance Program — Applications Due October 30

by Leave a Comment

IRS Compliance Assurance Process 2027
Large corporations with at least $10 million in assets may qualify for the IRS Compliance Assurance Process, which allows participating taxpayers to work with the agency on tax issues before filing their returns. voronaman/Shutterstock

Large corporations interested in resolving federal tax issues with the IRS before filing their returns have a limited window to apply for a program designed to do exactly that. The Internal Revenue Service announced on September 8 that it is accepting applications for the 2027 Compliance Assurance Process, commonly known as CAP. The application period runs through October 30, 2026, and the IRS expects to notify applicants in February 2027 about whether they have been accepted. Unlike a traditional IRS examination that occurs after a tax return has been filed, CAP is built around identifying and resolving potential tax issues in real time.

What the IRS Compliance Assurance Process Does

The IRS Large Business and International Division launched CAP as a pilot program in 2005, and the program became permanent in 2011. According to the IRS Compliance Assurance Process overview, participating taxpayers work with the agency to identify and resolve tax issues before filing their returns. The approach is intended to increase return accuracy, provide taxpayers with greater certainty about their tax positions, and reduce the need for extensive post-filing examinations.

That doesn’t mean participating companies receive a pass on IRS scrutiny.

CAP relies on what the agency describes as transparent and cooperative interaction between the taxpayer and the IRS. Companies must make timely disclosures, respond to information requests, and work with the agency to resolve material tax issues. Participation is also something taxpayers must apply for each year.

Not Every Corporation Can Apply

The program is aimed at large corporate taxpayers, and the IRS eligibility requirements set a significant financial threshold. Applicants generally must have assets of at least $10 million and cannot be under an investigation or involved in litigation with the IRS or another government agency if the situation would limit the IRS’s access to current corporate tax records.

Eligible taxpayers include U.S. publicly traded C corporations required to file Forms 10-K, 10-Q, and 8-K with the Securities and Exchange Commission. Qualifying privately held C corporations, including foreign-owned corporations, may also participate. Those companies must meet financial-statement requirements, including providing audited annual financial statements and unaudited quarterly statements. The IRS expanded CAP eligibility to privately held U.S. C corporations beginning with the 2026 program year.

New and Returning Applicants Face Different Requirements

The application isn’t identical for every corporation. The IRS application and selection guidance shows that both new and returning applicants must submit Form 14234, the CAP application, along with several other required documents. New applicants have additional requirements, including a Material Intercompany Transactions Template, Tax Control Framework Questionnaire, and Cross Border Activities Questionnaire. Open tax years can also affect eligibility.

Current CAP participants generally cannot have more than one filed return and one unfiled return open on the first day of the applicant’s CAP tax year, although the IRS provides several exceptions. New applicants may have up to three tax years open for examination on the first day of their CAP tax year. However, the examination team must determine that those years can reasonably be closed within 12 months after the first day of the CAP tax year.

The IRS says it is making no substantive changes to CAP application requirements or eligibility criteria for the 2027 application period.

October 30 Is the Key Date for Interested Corporations

Corporations considering CAP participation have until October 30, 2026, to submit their applications. Returning applicants submit their application to their assigned account coordinator or case manager. New applicants are instructed to email their application to the IRS CAP program mailbox using “CAP Application” and the applicable tax year in the subject line.

Companies accepted into the program will receive a CAP Memorandum of Understanding that must be signed and returned to secure participation.

For corporate tax departments and advisors working with businesses that meet the $10 million asset threshold, the approaching deadline provides a reason to review eligibility now rather than waiting until late October. Because CAP requires extensive cooperation and disclosure but can provide greater certainty about tax positions before a return is filed, companies should evaluate whether that tradeoff fits their tax compliance strategy before applying.

What to Read Next

IRS Raises Clean Electricity Production Tax Credit to 3.1 Cents Per Kilowatt-Hour for 2026

SEC Approves FINRA Change to Streamline How Investment Advisers Allocate Bulk Trades

IRS Finalizes New Car Loan Interest Deduction — Who Can Claim Up to $10,000

Paid IRS Penalties During the Pandemic? You May Be Able to Get Some Money Back

by Leave a Comment

Paid IRS Penalties During the Pandemic? You May Be Able to Get Some Money Back
A taxpayer reviews an old IRS notice and tax account for possible COVID-era penalty relief, including refunds or credits for certain eligible 2020 and 2021 penalties – Shutterstock

The pandemic created a spectacular mess of ordinary life, and taxes did not exactly escape the chaos. If you paid certain IRS penalties tied to your 2020 or 2021 taxes, you may qualify to get that money back through automatic penalty relief the IRS announced after the worst of the disruption had passed.

Not every pandemic-era tax penalty qualifies, and it certainly does not mean the IRS will send a check simply because the calendar once contained the word 2020. The relief comes with specific rules about the tax year, type of penalty, tax amount, and IRS notices, so checking the details matters before counting that refund money as found cash.

The IRS Gave Some Pandemic Penalties a Second Look

The IRS created special relief for certain taxpayers who faced failure-to-pay penalties for tax years 2020 and 2021. Under Notice 2024-7, the agency agreed to waive eligible penalties and refund or credit penalties that taxpayers had already paid.

The automatic relief generally covers individuals, businesses, estates, trusts and certain tax-exempt organizations that filed qualifying returns and had assessed tax below $100,000 for the applicable year. For individuals, qualifying returns generally include Form 1040-series returns, while certain businesses and organizations qualify through other specified forms.

The timing of the IRS notice also matters, because the automatic relief targeted taxpayers who received an initial balance-due notice, generally a CP14 or CP161, between February 5, 2022, and December 7, 2023. The IRS designed the program around taxpayers who entered the collection process after the agency temporarily paused certain collection notices during the pandemic.

If a taxpayer already paid the eligible penalty, the IRS can apply the money toward another outstanding federal tax liability or issue a refund when no other balance remains. In other words, a taxpayer who already handed over the money did not necessarily lose the chance to benefit from the relief.

Not Every Pandemic-Era Penalty Qualifies

Here comes the fine print, because taxes always seem to keep a tiny trapdoor hidden beneath the carpet. The 2020 and 2021 automatic relief primarily addresses certain failure-to-pay penalties, not every penalty that appeared on an IRS account during those years.

The IRS also offered separate relief under Notice 2022-36 for certain failure-to-file penalties involving eligible 2019 and 2020 returns filed by September 30, 2022. That program also allowed eligible penalties that taxpayers had already paid to receive refunds or credits, but the filing deadline for that particular relief has long since passed. That means a taxpayer should not lump every old IRS charge into one big “COVID penalty” bucket. A failure-to-file penalty, failure-to-pay penalty, estimated-tax penalty, and other IRS charges can follow different rules, and the notice attached to the charge can reveal exactly what happened.

There are also exclusions from the automatic 2020 and 2021 relief, including situations involving assessed tax of $100,000 or more and certain cases involving fraud, accepted offers in compromise, closing agreements or court-determined penalties. Taxpayers outside the automatic program may still qualify for other forms of penalty relief, including reasonable-cause relief or the First-Time Abate program, depending on their circumstances.

So, before celebrating over a hypothetical IRS windfall, identify the exact penalty first. A five-minute review of the tax account can prevent a lot of unnecessary optimism.

How to Check Whether the IRS Owes You

The easiest starting point involves the taxpayer’s IRS Online Account and tax records. The IRS says taxpayers can review account information and transcripts to see details connected to the penalty relief, which can help determine whether the agency already adjusted the account.

Look for an IRS notice or account entry showing an adjustment, refund or credit connected with the affected tax year. If another federal tax balance exists, the IRS may apply the money to that balance instead of sending a separate check, so a missing check does not automatically mean the relief disappeared.

A taxpayer who changed addresses should pay particular attention to the mailing information on file. The IRS notes that taxpayers may need to update their address to receive refunds or notices, and the agency generally mails a refund when the taxpayer did not request direct deposit on the original return.

If the account does not make sense, the next step involves contacting the IRS or reviewing the original penalty notice rather than guessing. Keep copies of the return, IRS notices, payment records and account information handy, especially when a taxpayer needs to challenge a penalty that falls outside the automatic program.

And there is one reassuring detail: eligible taxpayers did not need to submit a special application for the automatic 2020 and 2021 relief. The IRS handled that relief automatically, although taxpayers still need to pay attention to later notices and respond to unrelated tax issues when required.

The Old Tax Bill Could Still Have One More Surprise

For anyone who paid an eligible pandemic-era penalty, checking the IRS account could uncover money that never felt like a refund because the agency used it as a credit. That makes this less of a “wait for a mysterious check” situation and more of an account-reconciliation exercise. The IRS specifically says it can credit previously paid penalties toward another outstanding tax liability or issue a refund when appropriate.

The bigger lesson involves keeping old tax records even after the annual filing frenzy fades. Tax problems can linger for years, and an old IRS notice can suddenly become important when the agency changes how it handles a particular penalty. If the automatic relief does not cover the penalty, that does not necessarily end the conversation. The IRS allows certain taxpayers to request penalty relief based on reasonable cause, and taxpayers may qualify for First-Time Abate in appropriate circumstances.

In short, a pandemic-era IRS penalty deserves a second glance before it gets forgotten in the filing cabinet forever. If an eligible penalty already drained money from the household budget, the IRS may have an adjustment waiting that puts at least some of it back where it belongs.

Did you pay an IRS penalty during the pandemic and later discover that you qualified for penalty relief, or did the IRS automatically refund or credit the money? Share what happened in the comments.

You May Also Like…

Money Anxiety Is the New Pandemic—Here’s How to Cope

IRS Proposes New Investment Rules for Trump Accounts: What Parents Need to Know

Gig Workers Who Didn’t Set Aside Taxes Last Summer Are Facing Bills Right Now

IRS Is Shutting Down the FIRE Filing System Nov. 19 — What Businesses Need to Do Before 2027

What Most Users Still Don’t Know About Venmo, PayPal, and Their Taxes

Tax Deadlines Extension Filers Should Put on Their Calendar Now

by Leave a Comment

Tax Deadlines Extension Filers Should Put on Their Calendar Now
Extension filers should mark Oct. 15, 2026, as the federal filing deadline while also watching Sept. 15 for the third estimated tax payment. An extension gives more time to file, not more time to pay – Shutterstock

An October tax deadline can look deceptively far away on a calendar. For taxpayers who requested an extension for their 2025 federal return, however, Oct. 15, 2026, now sits close enough to deserve a bright red circle, because the extra time only extends the deadline to file, not the deadline to pay what was already owed.

That distinction can turn a calm September into a frantic October if it slips through the cracks. The good news is that extension filers do not need to wait for the calendar to reach Halloween season before dealing with their return, and a few well-placed reminders can make the whole process considerably less dramatic.

October 15 Is the Big Date, But It Shouldn’t Be the Only One on the Calendar

For most individuals who requested a timely federal extension, Oct. 15, 2026, marks the deadline to file the 2025 federal income tax return.
That date matters even if the return still needs a professional review, a missing document, or one last trip through the calculator. Putting Oct. 15 on the calendar now creates a useful target instead of treating the deadline like a surprise guest who suddenly appears at the door.

The smarter move involves setting an earlier personal deadline, such as late September, to leave room for mistakes or missing paperwork. A tax return rarely becomes more enjoyable because someone waits until the final evening, so getting the bulk of the work done early gives extension filers a much better shot at a clean, accurate submission.

An Extension Buys Filing Time, Not Payment Time

The IRS makes one point especially clear: an extension gives taxpayers additional time to file, but it does not give them additional time to pay taxes they owed for the year.  In other words, the extension works more like an extra filing lane than a pause button for the tax bill.

Anyone who still owes money should review the account, estimate the remaining balance, and pay as much as possible rather than assuming Oct. 15 resets everything. The IRS also offers payment options for taxpayers who cannot pay the full balance, so an intimidating bill does not automatically mean someone should ignore the problem and hope it disappears.

September 15 Deserves Its Own Calendar Alert

September brings another important tax date that can sneak up on people who focus exclusively on their extended annual return. For individuals who make estimated tax payments, Sept. 15, 2026, marks the due date for the third installment of 2026 estimated taxes. That deadline involves 2026 tax payments, while the Oct. 15 deadline concerns filing the 2025 federal return, so they serve completely different purposes.

Self-employed taxpayers and others who make quarterly estimated payments should keep those two tax tasks separate rather than tossing them into one giant mental folder labeled “tax stuff.” A calendar reminder for Sept. 15 can prevent a surprisingly easy mistake, especially when the extended 2025 return still occupies most of the attention.

Give the Tax Return a Pre-October Checkup

Extension filers should use September to gather every document, receipt, form, and record needed to finish the return accurately. The IRS specifically encourages taxpayers to gather and review their tax documents and notes that an Individual Online Account can provide access to account information, transcripts, payments, and other useful records. That checkup can also reveal a missing form or discrepancy while there still remains time to track down the problem.

Taxpayers who qualify can use IRS Free File, while Free File Fillable Forms remain available to taxpayers who prefer to prepare their own returns. For anyone working with a tax professional, September also offers a valuable chance to ask questions, provide missing paperwork, and resolve issues before the calendar starts shouting “October 15!” from every corner of the desk.

Don’t Assume Every Taxpayer Gets the Same October Deadline

Oct. 15 serves as the standard federal deadline for many individual extension filers, but certain taxpayers may qualify for additional time because of specific circumstances. The IRS notes that taxpayers affected by federally declared disasters can receive different filing deadlines, while certain military personnel and eligible support personnel can receive special deadline treatment. Those exceptions make it especially important to check the taxpayer’s specific situation rather than relying on a generic calendar reminder.

State tax agencies can also follow different filing and payment deadlines, so a federal extension does not automatically settle every state tax obligation.
Anyone who filed for a federal extension should check the applicable state rules as well, because nothing ruins a satisfying “taxes are done” moment quite like discovering a second deadline hiding in the paperwork.

The Best Tax Deadline Is the One That Doesn’t Sneak Up

The easiest way to handle an extension involves turning one intimidating date into several smaller checkpoints. A useful calendar could flag Sept. 15 for estimated taxes when applicable, late September for a document and return review, early October for a final accuracy check, and Oct. 15 for the federal filing deadline. That approach leaves time to deal with missing information instead of forcing every problem into one stressful week.

Most importantly, extension filers should remember what the extra time actually provides: more time to prepare and submit the return, not a free pass to postpone tax payments. With the important dates sitting visibly on the calendar, October 15 can become a finish line instead of a five-alarm tax emergency.

What tax deadline has caused the biggest scramble in your household, and what calendar trick finally helped keep it under control?

You May Also Like…

Should You Pay $25,000 in Taxes Today to Avoid a Bigger Tax Bill in Retirement?

IRS Is Shutting Down the FIRE Filing System Nov. 19 — What Businesses Need to Do Before 2027

What Would Break Your Retirement Plan First?

Your Financial Advisor Wants You to Roll Over Your 401(k) – Ask These 7 Questions First

Many Americans Miss This June Tax Deadline Every Year — And Pay a Penalty for It

IRS Proposes New Investment Rules for Trump Accounts: What Parents Need to Know

by Leave a Comment

Trump Account investment rules
The IRS and Treasury Department proposed new rules on August 20 governing investments in Trump Accounts for children. During the accounts’ growth period, funds generally would be limited to qualifying low-cost mutual funds and ETFs that track indexes made up primarily of U.S. companies. fizkes/Shutterstock

The IRS has proposed new rules governing how money in Trump Accounts for children can be invested, including strict limits on fund fees, leverage and the types of stock indexes the investments can track.

The Department of the Treasury and Internal Revenue Service issued the proposed regulations on August 20 as part of the ongoing rollout of Trump Accounts, a new type of traditional individual retirement account created for eligible children under the Working Families Tax Cuts.

During a child’s account “growth period,” families won’t have unlimited freedom to choose stocks, cryptocurrencies or other investments. Instead, money generally must remain in qualifying low-cost mutual funds or exchange-traded funds, or ETFs, that meet federal requirements.

The IRS says the restrictions are designed to encourage investment in low-fee funds that can potentially compound over many years.

What Investments Would Be Allowed in a Trump Account?

Under the proposed rules, an eligible investment generally must be a mutual fund or ETF that tracks an equity index composed primarily of U.S. companies.

The IRS points to an index such as the S&P 500 as an example.

The fund also cannot use leverage and generally cannot charge annual fees and expenses exceeding 0.1% of the amount invested in the fund.

That fee limit is equivalent to no more than about $1 annually for every $1,000 invested, although the actual dollar amount would change as the account balance changes.

The rules therefore steer Trump Accounts during childhood toward relatively low-cost, index-based investments rather than allowing families to select virtually any security they want.

What Happens If Parents Don’t Choose an Investment?

Families also won’t necessarily have to select a fund themselves.

According to the IRS announcement on the proposed investment regulations, if the beneficiary doesn’t select an eligible investment from the choices offered by the account trustee, the money will automatically be placed in an eligible investment selected by that trustee during the growth period.

The proposed regulations include procedures trustees would use to determine whether an investment meets the government’s requirements and to ensure Trump Account money remains invested appropriately.

Those restrictions don’t last forever.

The growth period begins when the beneficiary’s initial Trump Account is established and ends on December 31 of the calendar year in which the beneficiary turns 17. After that period ends, the special eligible-investment restrictions no longer apply, and most traditional IRA rules generally take over.

Some Children Can Receive a $1,000 Federal Contribution

A separate pilot program provides a one-time $1,000 Treasury contribution for certain children.

The IRS guidance on the Trump Account pilot program says an eligible child must be a U.S. citizen with a valid Social Security number who was born in 2025, 2026, 2027 or 2028, and an election must be made for the child.

Parents and other qualifying individuals can make the election using Form 4547, Trump Account Election(s).

The August IRS announcement says parents, guardians and other authorized individuals can use the IRS Individual Online Account to complete Form 4547 for a child with a Social Security number, provided the election is made before the calendar year in which the child turns 18.

For an eligible child born during the pilot-program years, the person making the election can check the applicable box on Form 4547 to request the $1,000 contribution.

Families Can Put Additional Money Into the Account

The $1,000 pilot contribution isn’t necessarily the only money that can go into a Trump Account.

IRS guidance says ordinary contributions from sources such as family members and friends generally count toward a $5,000 annual contribution limit during the growth period, with that limit subject to cost-of-living adjustments after 2027.

The $1,000 federal pilot contribution doesn’t count against that $5,000 limit.

Certain other types of contributions receive different treatment as well. For example, the IRS issued separate proposed regulations in August covering employers that choose to contribute to Trump Accounts for employees or their dependents.

The IRS employer-contribution guidance says qualifying employer contributions can be as much as $2,500 annually during the growth period, subject to the applicable rules and limits.

Parents Should Understand the Withdrawal Restrictions

Families should also understand that a Trump Account isn’t designed to function like an ordinary savings account for childhood expenses.

During the growth period, distributions generally aren’t allowed except for limited circumstances identified by the IRS, including certain rollovers, qualified rollovers to an ABLE account at age 17, distributions of excess contributions and distributions following the beneficiary’s death.

After the growth period, most traditional IRA rules generally apply.

That means distributions can potentially be subject to the 10% additional tax on early withdrawals unless an exception applies. IRS guidance identifies qualified higher-education expenses and certain first-home purchases as examples of situations in which an exception may be available.

Parents considering the account should therefore distinguish between money they want to invest for the child’s longer-term future and money they may need for ordinary expenses while the child is still growing up.

The Investment Rules Aren’t Final Yet

The August 20 regulations are proposed, which means the details aren’t being presented as final regulations yet.

Treasury and the IRS developed the proposal after considering stakeholder comments submitted in response to Notice 2025-68, which was issued in December 2025.

The agencies are now requesting another round of public feedback.

Comments on the proposed eligible-investment regulations are due by October 20, 2026, with submission instructions contained in the proposed regulations.

The IRS says the regulations generally are proposed to apply to tax years beginning on or after January 1, 2026.

For families considering a Trump Account, the proposal provides a clearer picture of how the accounts are intended to operate during childhood: money generally would be directed into low-cost, primarily U.S. stock-index mutual funds or ETFs, while access to the funds would remain restricted until the special childhood growth period ends.

What to Read Next

IRS Is Shutting Down the FIRE Filing System Nov. 19 — What Businesses Need to Do Before 2027

What Would Break Your Retirement Plan First?

IRS Keeps Interest Rate at 7% for Taxpayers Who Owe Money in Late 2026

IRS Is Shutting Down the FIRE Filing System Nov. 19 — What Businesses Need to Do Before 2027

by Leave a Comment

IRS FIRE system retirement
The IRS will stop accepting information returns through its FIRE system on November 19, 2026, at 3 p.m. ET. Current FIRE users will need a separate IRIS Transmitter Control Code to electronically file tax year 2026 information returns during the 2027 filing season. A9 STUDIO/Shutterstock

The IRS is warning businesses, tax professionals and other information-return filers that its long-running FIRE electronic filing system is approaching its final shutdown, with the last opportunity to submit information returns through the platform coming in November 2026.

Beginning with the 2027 filing season, filers who previously used the Filing Information Returns Electronically system, commonly known as FIRE, will need to transition to the newer Information Returns Intake System, or IRIS, to electronically file tax year 2026 information returns.

The IRS announced the latest transition details in an August 24 reminder and is encouraging current FIRE users to prepare before the shutdown rather than waiting until filing deadlines approach.

The Final FIRE Filing Deadline Is November 19

The IRS has established several important dates for current FIRE users. November 1, 2026, is the last day filers can submit test information returns through the FIRE Trading Partner Test System. November 9 is the final day to make changes to existing Information Returns Applications for Transmitter Control Codes, or TCCs.

Most importantly, November 19, 2026, at 3 p.m. Eastern Time is the last day information returns can be filed through FIRE. After the November maintenance window, the system will no longer accept information-return submissions. Beginning after January 1, 2027, IRIS will be the IRS’s only electronic filing system for information returns previously handled by FIRE, including current-year returns, prior-year returns and corrections.

Current FIRE Users Need a New IRIS TCC

Filers shouldn’t assume their existing FIRE credentials will automatically carry over to IRIS. The IRS says current FIRE users must complete an IRIS Application for Transmitter Control Code before filing through the new platform. Transmitter Control Codes aren’t interchangeable between the different IRS intake systems, meaning a FIRE TCC can’t simply be used to submit returns through IRIS.

That’s one reason the IRS is encouraging businesses, tax professionals and other affected filers to begin the transition now. The change is particularly important for organizations that electronically submit large volumes of information returns, including many forms in the 1099 series.

Employers should note that W-2 series forms follow a different process and are filed electronically with the Social Security Administration rather than through FIRE or IRIS. Other specialized information returns can also use different filing systems, so filers should verify which IRS or federal platform applies to the specific forms they submit.

IRIS Offers Two Ways to Submit Information Returns

IRIS isn’t entirely new. The IRS introduced the system in 2023 and has gradually expanded it as part of the transition away from FIRE.

The first filing option is the IRIS Taxpayer Portal, a free web-based system that allows users to electronically file up to 100 returns at a time. Filers can manually enter information or upload it through a CSV file, download copies for recipients and maintain records of completed and submitted forms.

For businesses, payroll processors, tax professionals and other filers handling larger volumes, the IRS also offers IRIS Application to Application, commonly called A2A.

That option allows filers using third-party software—or organizations that develop their own software—to transmit larger volumes of information returns directly through IRIS.

Beginning in 2027, the IRS says all forms previously supported through FIRE will be available through IRIS.

Waiting Until Filing Season Could Create Problems

The transition matters because tax year 2026 information returns will generally be filed during the 2027 filing season, when FIRE will no longer be available as a fallback.

A business or tax professional who discovers in January that an existing FIRE TCC doesn’t work with IRIS could therefore face unnecessary delays while trying to complete the new registration and filing process.

The IRS recommends that current FIRE users complete their IRIS TCC application, review available IRIS filing guidance and begin preparing for the transition before FIRE shuts down.

Filers can also subscribe to IRIS QuickAlerts for information about system changes and maintenance. The IRS holds IRIS Working Group meetings on the second Wednesday of each month, although participants must register each month to receive the meeting link.

The agency says it will continue providing transition information through those working groups, QuickAlerts and IRS.gov as the final FIRE shutdown approaches.

For businesses and tax professionals that still rely on FIRE, the key takeaway is simple: November 19 at 3 p.m. ET is the end of the road for FIRE submissions, and an existing FIRE TCC isn’t enough to start filing through IRIS in 2027. Preparing the new IRIS access now could prevent a last-minute filing problem when tax season arrives.

What to Read Next

IRS Keeps Interest Rate at 7% for Taxpayers Who Owe Money in Late 2026

Your Financial Advisor Wants You to Roll Over Your 401(k) – Ask These 7 Questions First

IRS Proposes New Restrictions on Refundable Tax Credits for Some Immigrants

You Have $2 Million Saved. What Could Still Derail Your Retirement?

by Leave a Comment

You Have $2 Million Saved. What Could Still Derail Your Retirement?
A $2 million retirement portfolio can provide a strong financial foundation, but spending habits, market downturns, taxes, healthcare costs, and unexpected expenses can still put long-term retirement security at risk – Shutterstock

Having $2 million tucked away for retirement sounds like the financial equivalent of reaching the top of the mountain. It is a huge accomplishment, but it does not automatically guarantee a worry-free retirement, because the way that money gets spent, invested, taxed, and protected matters just as much as the balance on the statement.

A large portfolio can still run into trouble when spending gets too aggressive, markets fall early in retirement, taxes take a bigger bite than expected, or a major life expense barges through the front door without an invitation. The good news is that most of these risks have something in common: thoughtful planning can reduce them long before they become emergencies.

A Big Balance Can Hide a Big Spending Problem

The first danger involves lifestyle creep, which can sneak into retirement wearing perfectly innocent clothing. A larger nest egg can make a new car, expensive travel, home renovations, generous gifts, or frequent restaurant meals feel perfectly reasonable, but several individually manageable expenses can add up to a surprisingly large annual withdrawal.

Retirement also changes the psychology of spending because the paycheck no longer arrives every couple of weeks to refill the account. Someone with $2 million might feel comfortable spending heavily during the first few years, only to discover later that the portfolio needs to support decades of living expenses, not just the exciting early-retirement years.

A smart retirement plan should therefore start with actual spending rather than a convenient withdrawal percentage. Separate essential costs, such as housing, food, insurance, utilities, and healthcare, from flexible expenses such as travel and entertainment. That distinction creates room to tighten spending during difficult market periods without turning every dinner out into a financial crisis.

Market Losses Can Hurt More at the Beginning

A $2 million portfolio still has to live through market downturns. The timing of those downturns matters because selling investments to fund living expenses during a major decline can leave fewer assets available for the eventual recovery.

Consider a retiree who begins retirement with a carefully diversified portfolio and then encounters a sharp market decline. If that person keeps withdrawing the same amount regardless of market conditions, the portfolio may face a much tougher recovery than it would if the retiree temporarily reduced discretionary spending or used other available cash.

That does not mean retirees should stuff every dollar into cash and hide from the stock market. Inflation can quietly erode purchasing power, while a portfolio that contains only ultra-conservative investments may struggle to support a long retirement. A better approach involves matching investments with the retirement timeline, keeping enough readily available money for near-term expenses, and creating a spending strategy that can adjust when markets become unpleasant.

Taxes Can Turn $2 Million Into a Smaller Number

The phrase “$2 million saved” leaves out one crucial detail: where the money lives. A portfolio split among traditional retirement accounts, Roth accounts, and taxable investments can create a very different tax picture from a portfolio concentrated almost entirely in traditional accounts.

The IRS notes that many pension, annuity, IRA, and retirement-plan distributions can count as taxable income, depending on the account and type of distribution. That means a retiree cannot simply divide $2 million by the number of retirement years and assume every dollar represents spendable money.

Taxes also require attention later in retirement because required minimum distributions can force withdrawals from certain retirement accounts. Under current IRS rules, many account owners begin RMDs at age 73, and failing to take the required amount can trigger a substantial excise tax. Tax planning before those withdrawals arrive can help retirees decide which accounts to tap first and when a particular withdrawal makes financial sense.

Social Security and Healthcare Still Matter

A large portfolio does not make Social Security irrelevant. Claiming decisions can affect the amount of monthly income a retiree receives, and the Social Security Administration notes that retirement benefits generally increase for people who delay claiming between full retirement age and age 70. The right decision depends on factors such as health, household income, longevity expectations, and whether a spouse also receives benefits.

Healthcare creates another potential budget spoiler because retirement does not eliminate medical expenses. Medicare provides important coverage, but retirees still need to account for premiums, deductibles, supplemental coverage, prescriptions, dental care, vision expenses, and costs that Medicare does not cover. A retirement plan that looks perfect on paper can start looking rather different when healthcare costs consistently run above the original budget.

The Biggest Risk May Not Come From the Portfolio

Some retirement derailers have nothing to do with stocks or bonds. A long-term care need, an expensive home repair, financial support for an adult child, divorce, the death of a spouse, or a major uninsured expense can change the financial picture quickly.

That makes flexibility one of the most valuable assets in retirement. A retiree with $2 million and no ability to adjust spending may face more pressure than someone with a somewhat smaller portfolio, lower fixed expenses, and several ways to generate income. Keeping insurance current, maintaining an emergency reserve, reviewing beneficiaries, and coordinating an estate plan can protect a retirement strategy from problems that never appear on an investment statement.

Make the $2 Million Work Like a Plan, Not a Prize

A $2 million portfolio can provide an impressive financial foundation, but retirement success depends on what happens after the celebration. The real work involves coordinating investments, spending, taxes, Social Security, healthcare, insurance, and estate planning so that one weak spot does not undermine everything else.

The strongest retirement plan also leaves room for change because life rarely follows the spreadsheet perfectly. Markets fall, expenses jump, tax rules change, and personal priorities evolve. Treating $2 million as a starting point for a thoughtful income strategy, rather than permission to spend freely, can make the difference between a retirement that merely looks wealthy on paper and one that remains financially durable for years to come.

What do you think poses the biggest threat to a $2 million retirement: overspending, taxes, market downturns, healthcare costs, or something else?

You May Also Like…

At What Point Does Saving More for Retirement Stop Improving Your Life?

What Would Break Your Retirement Plan First?

The Retirement Expense Nobody Budgets for: Helping Adult Children

Should You Count Your Home in Your Retirement Net Worth?

6 Social Security Earnings-Test Details Workers Near Retirement Often Misread

You Have $2 Million Saved. What Could Still Derail Your Retirement?

by Leave a Comment

You Have $2 Million Saved. What Could Still Derail Your Retirement?
A $2 million retirement portfolio can provide substantial financial flexibility, but taxes, healthcare costs, market downturns, and lifestyle spending can still reshape the plan – Shutterstock

Having $2 million saved for retirement sounds like the financial equivalent of crossing the finish line with plenty of room to spare. But a big portfolio does not automatically create a comfortable retirement, because the real question involves how much money leaves the account, how quickly it leaves, and how much income the portfolio can produce along the way.

That distinction matters because retirement turns saving into spending, and spending introduces a whole new collection of financial problems. Taxes can take a bite, healthcare can produce ugly surprises, markets can stumble at the wrong moment, and an apparently reasonable lifestyle can quietly become much more expensive than expected. A $2 million nest egg can provide tremendous flexibility, but it still needs a plan.

The $2 Million Number Can Be Misleading

A retirement portfolio looks impressive when viewed as one giant number, but retirees rarely spend the entire balance at once. Instead, the money needs to support housing, food, transportation, insurance, travel, taxes, gifts, emergencies, and all those little expenses that somehow multiply once work disappears from the calendar.

Consider a household that owns its home, carries no consumer debt, and expects Social Security to cover part of its basic expenses. That household may have a very different retirement outlook from someone with the same $2 million who still carries a mortgage, supports adult children, travels frequently, or expects the portfolio to cover nearly every expense. The account balance tells only part of the story.

The first useful exercise involves calculating the annual spending requirement and separating essential expenses from optional ones. That distinction creates breathing room because travel or a kitchen renovation can wait during a rough market year, while groceries and insurance premiums usually cannot. A retirement plan should therefore focus less on whether $2 million sounds rich and more on whether the portfolio, Social Security, other income, and spending habits fit together.

Taxes Can Turn a Big Balance Into a Smaller Spending Budget

A $2 million portfolio also does not necessarily equal $2 million of spendable money, especially when much of the balance sits inside traditional retirement accounts. Withdrawals from traditional 401(k)s and traditional IRAs generally count as taxable income, so the amount available for actual spending can fall after taxes enter the picture. A retiree who mentally treats every dollar in the account as a dollar available for shopping, travel, or bills may discover that arithmetic unpleasantly quickly.

Tax planning can also matter before retirement begins. Someone with a mix of traditional, Roth, and taxable accounts may have more flexibility than someone who holds nearly everything in one tax-deferred bucket, because different accounts create different tax consequences when the owner withdraws money.

The IRS set the 2026 401(k) elective deferral limit at $24,500 and the IRA contribution limit at $7,500, with additional catch-up opportunities for eligible older workers. Those figures matter for people still building their portfolios, but retirees should think about taxes from the other direction: which accounts should supply income, when should withdrawals happen, and how might those decisions affect future tax bills. A good retirement plan treats taxes as an expense that deserves a place in the budget rather than a surprise that arrives after the spending plan already looks perfect.

Healthcare Can Change the Math in a Hurry

Healthcare deserves its own line in the retirement plan because Medicare does not eliminate every medical expense. Medicare covers many important services, but premiums, deductibles, coinsurance, prescription costs, dental care, vision care, and other expenses can still require substantial cash.

For 2026, the standard Medicare Part B premium sits at $202.90 per month, while the annual Part B deductible reaches $283. Higher-income beneficiaries can pay additional income-related amounts, which makes tax planning even more relevant for households with substantial assets and income.

Healthcare also creates a planning problem that has nothing to do with predicting the exact bill. A healthy retiree can still face a major medical event, a long recovery, or a need for extended care, so the plan needs enough flexibility to absorb an expensive year without forcing large investment sales at an unfortunate time. Health-related expenses can also collide with other retirement goals, turning a seemingly affordable travel budget into a much less comfortable decision after a major medical bill arrives.

A Bad Market at the Wrong Time Can Hurt More Than a Bad Market Later

A market decline does not automatically destroy a $2 million portfolio, but the timing of withdrawals can make a downturn much more painful. Someone who keeps withdrawing large amounts while investments sit in a deep decline may sell more shares to fund the same lifestyle, leaving fewer shares available when markets recover.

That problem makes a cash reserve and a flexible spending strategy valuable tools. A retiree might reduce discretionary spending during a prolonged downturn, use other income sources for essential bills, or draw from assets that did not fall as sharply instead of automatically selling the same investments every month.

The opposite problem can also cause trouble: keeping nearly everything in cash because retirement feels too important for investment risk. Inflation can quietly reduce purchasing power, and a portfolio that never grows enough may struggle to support a retirement that lasts decades. The goal involves balancing growth, income, diversification, liquidity, and spending rather than chasing a magical portfolio that never loses value.

Lifestyle Creep Can Sneak Into Retirement Wearing Comfortable Shoes

Retirement often creates more free time, and free time can become surprisingly expensive. More restaurant meals, longer trips, new hobbies, home projects, grandchild visits, recreational vehicles, or frequent weekend getaways can turn a modest spending plan into a much larger one without any single purchase looking outrageous.

A household might retire expecting to spend $80,000 a year and then discover that the first few years cost considerably more because they finally have time to do everything they postponed during their working years. That does not mean those experiences represent irresponsible spending, but the portfolio needs to support them without forcing future cuts when the novelty wears off.

A smart plan can separate temporary retirement spending from permanent lifestyle costs. Travel-heavy early years may require a larger budget, while later years might shift toward healthcare, household support, or other needs. Building those changes into the plan can prevent the common mistake of assuming every retirement year will look exactly like the first one.

The Biggest Risk May Be Having No Plan for the Next 20 Years

A $2 million portfolio gives a retiree options, but options work best when the household knows what each dollar needs to accomplish. Social Security adds another important piece, and the program provided a 2.8% cost-of-living adjustment for 2026, although individual benefit amounts depend on each person’s earnings record and claiming decisions.

That income can help cover recurring expenses, while investments can handle additional spending and unexpected costs. The strongest plan also revisits beneficiaries, insurance coverage, estate documents, investment allocations, withdrawal strategies, and major tax decisions as circumstances change. Retirement planning should not end when someone stops working because life has a funny habit of ignoring financial spreadsheets.

The real victory with $2 million comes from turning the balance into a durable income strategy rather than treating the number itself as proof that everything will work out. A household that controls spending, anticipates taxes, prepares for healthcare costs, manages investment risk, and adjusts when circumstances change can give that money a much better chance of supporting the life it was meant to fund. The impressive number matters, but the decisions surrounding it matter even more.

The Finish Line Is Actually a Starting Line

Having $2 million saved can put someone in an enviable financial position, but retirement still requires active decisions. The portfolio needs a job, the spending plan needs boundaries, and the household needs enough flexibility to handle the inevitable surprises that arrive without checking the calendar first.

The smartest question therefore is not simply, “Is $2 million enough?” A better question asks, “What does this money need to do, and what could make that plan fail?” Answering that question before retirement can turn a large nest egg from a comforting number into a much more useful financial safety net.

What do you think poses the biggest threat to a $2 million retirement nest egg: taxes, healthcare, spending, market volatility, or something else? Share your thoughts in the comments.

You May Also Like…

What Would Break Your Retirement Plan First?

The “One More Year” Retirement Question: How Much Difference Can Working 12 More Months Really Make?

Should You Count Your Home in Your Retirement Net Worth?

6 Reasons a $1 Million Retirement Portfolio Can Support Very Different Lifestyles

How Much Monthly Income Does the Average American Over 70 Have in Retirement?

Should You Pay $25,000 in Taxes Today to Avoid a Bigger Tax Bill in Retirement?

by Leave a Comment

Should You Pay $25,000 in Taxes Today to Avoid a Bigger Tax Bill in Retirement?
A Roth conversion can create future tax flexibility, but paying $25,000 in taxes today only makes sense when the current cost fits the larger retirement plan – Shutterstock

Paying $25,000 in taxes today to potentially save more money on taxes decades from now sounds a little like volunteering to get punched before the fight even starts. Yet that strategy can make sense for some retirement savers, especially when it involves converting money from a traditional IRA to a Roth IRA. The catch sits in the details, because paying a giant tax bill now does not automatically create a giant tax savings later.

A Roth conversion essentially moves money from a traditional retirement account into a Roth account, and the untaxed portion generally counts as income in the year of the conversion. That can hurt today, but qualified Roth withdrawals can avoid federal income tax later, and the original owner of a Roth IRA does not face required minimum distributions during their lifetime. So when does paying $25,000 now actually make sense?

The $25,000 Tax Bill Could Buy Something Valuable

The first thing to recognize involves what that $25,000 actually buys: future tax flexibility. Someone who converts traditional IRA money to a Roth IRA generally adds the taxable portion of that conversion to current-year income, which can push more income into higher tax brackets. That makes the size and timing of the conversion enormously important, because dumping a large amount into one tax year can create a much nastier tax bill than spreading conversions across several years. A person with a temporarily low-income year may have a particularly interesting opportunity, such as someone who recently retired but has not started collecting large amounts of taxable retirement income. The same strategy could look much less attractive for someone already sitting near the top of a tax bracket.

There also sits a psychological advantage that financial spreadsheets rarely capture: paying the tax now can remove some uncertainty from future retirement planning. Traditional IRA withdrawals generally count as taxable income, and required minimum distributions generally begin at age 73 for traditional IRAs and many workplace retirement plans. Roth IRAs follow a different path for the original owner, since the account does not require lifetime RMDs. That difference can give a retiree more control over which accounts provide income in a particular year. Still, tax flexibility does not equal guaranteed savings, so the $25,000 payment needs a real reason behind it.

Retirement Taxes Could Look Very Different Later

Nobody can know exactly what tax rates will look like decades from now, which makes the decision more complicated than a simple today-versus-tomorrow calculation. Current 2026 federal income tax rates range from 10% to 37%, with different income thresholds for different filing statuses. A retiree who expects substantially lower taxable income later could save money by leaving traditional retirement funds alone and paying taxes when withdrawals occur. On the other hand, someone who expects substantial retirement income from pensions, Social Security, investments, rental property, or large retirement accounts could face a very different tax picture. The key question does not involve whether taxes will rise or fall in the abstract, but whether the household expects its own taxable income to make a Roth conversion worthwhile.

Consider a fictional worker named Karen who retires at 60 and has several years before RMDs enter the picture. Her income drops sharply after retirement, creating room for a carefully sized Roth conversion without pushing every converted dollar into the highest possible bracket. She could convert part of her traditional IRA, pay the resulting tax, and repeat the process in later years if the numbers continue to work. That approach can look far more sensible than converting a huge balance in one dramatic tax-year fireworks show. The IRS also notes that a Roth conversion creates taxable income from untaxed traditional IRA amounts, so the tax bill deserves careful calculation before anyone moves the money.

Paying the Tax From Retirement Money Can Change the Math

Here comes a detail that can quietly make or break the strategy: where the $25,000 comes from. Using money outside the retirement account to pay the tax can allow the full conversion amount to remain inside the Roth, while using retirement funds for the tax can reduce the amount that actually reaches the Roth. That distinction matters because the converted money could otherwise continue growing inside the Roth under its applicable rules. A person considering a large conversion therefore needs to look beyond the tax bill and examine the source of the cash used to pay it. Paying $25,000 from a savings account can produce a very different long-term result from pulling that $25,000 out of a retirement account.

Cash flow matters for another reason, too: a large conversion can create a tax bill that arrives before the retirement benefit arrives. The IRS notes that people with taxable conversion income may need to increase withholding or make estimated tax payments. Nobody wants to discover that the brilliant Roth strategy also produced an unpleasant tax-payment surprise because the money sat in the wrong account at the wrong time. A conversion plan should therefore include the federal tax, possible state tax, payment timing, and the money available outside retirement accounts. The goal involves controlling the tax bill, not simply moving it from one account to another and hoping for the best.

A Roth Conversion Should Fit the Whole Retirement Plan

A Roth conversion can look fantastic in isolation and still make little sense when the rest of the financial picture enters the room. The decision should account for current income, filing status, existing retirement balances, expected future withdrawals, other taxable income, and the money available to pay the conversion tax. It also helps to consider how much money the household actually needs in retirement rather than converting money simply because a Roth sounds tax-friendly. The IRS limits annual IRA contributions, but those contribution limits do not prevent qualifying Roth conversions from moving larger amounts from traditional retirement accounts into Roth accounts. That distinction matters because a conversion and a regular Roth IRA contribution follow different rules.

For someone facing a potential $25,000 tax bill, the smartest move may involve converting less, converting over several years, or skipping the conversion entirely. A tax professional can model several scenarios instead of treating the decision like a yes-or-no referendum on Roth IRAs. A useful comparison should show what happens if the money stays in the traditional account, what happens under a partial conversion, and what happens under a larger conversion. It should also account for the tax payment itself, because that money has an opportunity cost if it leaves an investment account or savings account. The right answer depends less on the scary size of today’s tax bill and more on what that payment accomplishes for the household’s future tax flexibility.

The Real Question Behind That $25,000 Check

Paying $25,000 in taxes today can make sense when it deliberately trades a known current cost for meaningful future tax flexibility. It makes less sense when someone treats a Roth conversion as an automatic tax-saving trick without examining current and future income. Traditional accounts can provide valuable tax benefits now, while Roth accounts can provide valuable tax characteristics later, so neither account deserves the title of universal winner. The most attractive conversion opportunities often appear when income temporarily falls and the taxpayer can control how much additional income enters the tax return. That makes timing one of the most powerful pieces of the puzzle.

The bigger lesson involves resisting the temptation to judge the strategy by the tax bill alone. A $25,000 payment can feel painful, but the relevant comparison involves the taxes paid today, the amount converted, the potential future withdrawals, the tax treatment of those withdrawals, and the investment growth that occurs along the way. Nobody gets a crystal ball for future tax rates, which makes flexibility particularly valuable in retirement planning. A carefully designed conversion can create more options, while an oversized conversion can simply create a very expensive headache. Before writing that $25,000 check, the numbers should prove that the money actually earns its keep.

Would paying $25,000 in taxes today make sense for your retirement plan, or would you rather keep the money in a traditional account and deal with the taxes later?

You May Also Like…

Should You Make A Roth Conversion Now Or Wait For January’s Tax Environment To Settle?

What Would Break Your Retirement Plan First?

Is it Too Late at 45? How to Use the Mega Backdoor Roth to Dump Tens of Thousands into Retirement in One Year

6 Tools That Shouldn’t Be Linked to Retirement Accounts

The “One More Year” Retirement Question: How Much Difference Can Working 12 More Months Really Make?

IRS Keeps Interest Rate at 7% for Taxpayers Who Owe Money in Late 2026

by Leave a Comment

IRS interest rates 2026
The IRS will keep its interest rate on individual tax underpayments and overpayments at 7% annually, compounded daily, for the fourth quarter beginning October 1, 2026. Pixel-Shot/Shutterstock

Taxpayers carrying an unpaid federal tax balance will continue facing a 7% annual interest rate through the end of 2026.

The Internal Revenue Service announced August 21 that interest rates will remain unchanged for the calendar quarter beginning October 1, 2026. For individuals, both tax underpayments and overpayments will carry a 7% annual rate, compounded daily.

That means taxpayers who owe the IRS should not expect interest costs to become cheaper during the final three months of the year. On the other hand, taxpayers entitled to interest on certain delayed refunds will continue receiving the same 7% rate.

What the 7% IRS Interest Rate Means for Taxpayers

Interest can become important when someone files a tax return but cannot immediately pay the entire balance due. The IRS generally charges interest on unpaid taxes, and because that interest compounds daily, delaying payment can steadily increase the amount owed.

The fourth-quarter rate applies from October 1 through December 31, 2026. The IRS calculates rates quarterly, so the percentage can rise or fall in subsequent quarters depending on changes in the federal short-term rate.

For taxpayers other than corporations, the underpayment and overpayment rates are calculated using the federal short-term rate plus three percentage points. The IRS said the fourth-quarter rates were based on the federal short-term rate determined during July 2026.

The Rate Isn’t Increasing From the Previous Quarter

The announcement does not represent a new increase for taxpayers. Individual overpayments and underpayments were already subject to a 7% rate during the third quarter of 2026, covering July through September.

That distinction may be useful for consumers who see headlines about a “7% IRS interest rate” and assume a new increase is taking effect in October. Instead, the agency is maintaining its existing rate.

IRS rates have moved during 2026. The individual rate was 7% during the first quarter, fell to 6% for the second quarter and returned to 7% for the third quarter before remaining there for the fourth.

Overpayments Can Earn Interest Too

Interest does not work exclusively against taxpayers. The IRS can also pay interest on qualifying overpayments when taxpayers have paid more than they owe and the government does not issue the refund within the applicable time period.

For individuals, the fourth-quarter overpayment rate will also remain 7% annually, compounded daily. However, taxpayers should not interpret that as meaning every tax refund automatically earns 7% interest. Whether interest is owed depends on the circumstances and timing surrounding the refund.

The IRS describes an overpayment as a payment made in excess of the amount owed.

Corporations Have Different Interest Rates

Businesses should pay attention to a separate set of numbers. For the fourth quarter, the corporate overpayment rate will be 6%, while the rate on the portion of a corporate overpayment exceeding $10,000 for a taxable period will be 4.5%.

The general underpayment rate remains 7%, while large corporate underpayments are subject to a substantially higher 9% rate.

These differences result from formulas established under the Internal Revenue Code. Generally, corporate overpayments use the federal short-term rate plus two percentage points, while large corporate underpayments use the federal short-term rate plus five percentage points.

Owing the IRS Can Become More Expensive the Longer You Wait

For households, the practical takeaway is straightforward: a tax balance that remains unpaid can continue accumulating interest even though the fourth-quarter rate isn’t increasing.

Taxpayers who discover they owe money after filing should therefore avoid assuming that waiting until the next quarter will automatically produce a lower interest rate. IRS rates are recalculated quarterly, and future rates can move in either direction.

The complete fourth-quarter calculations are contained in Revenue Ruling 2026-15, which the IRS says will appear in Internal Revenue Bulletin 2026-36 dated August 31, 2026. Taxpayers who need information about their own balances, payment options or interest charges can use IRS.gov or consult a qualified tax professional.

What to Read Next

IRS Proposes New Eligibility Rules for Refundable Payments From 4 Tax Credits

IRS Issues New Guidance on Expanded Paid Family and Medical Leave Tax Credit

Government Imposter Scams: How to Verify an IRS, SSA, or Medicare Contact