What Is a Withdrawal?
You make a withdrawal when you remove funds from a bank account, savings plan, pension, or trust. In some cases, you must meet certain conditions to withdraw funds without facing a penalty. A penalty for an early withdrawal typically applies when you break a clause in an investment contract. For instance, if you withdraw from a retirement account like an IRA before you're 59 1/2 years old, you'll face a significant fee.
Key Takeaways
A withdrawal is simply the action of removing funds from a bank account, savings plan, pension, or trust. Some accounts aren't like basic bank accounts and include fees for withdrawing funds early. Both certificates of deposit and individual retirement accounts impose penalties if you take out funds before the agreed time.
How a Withdrawal Works
You can carry out a withdrawal in fixed or variable amounts, or as one lump sum, and it can be a cash withdrawal or an in-kind one. A cash withdrawal means converting the holdings in your account, plan, pension, or trust into cash, often through a sale. An in-kind withdrawal, on the other hand, just involves taking possession of assets without turning them into cash.
Retirement Account Withdrawals
Some retirement accounts, like IRAs, come with special rules on when and how much you can withdraw. For example, if you were born between 1951 and 1959, you must start taking the required minimum distribution (RMD) from a traditional IRA by age 73, or by age 75 if born in 1960 or later. If you don't, you'll face a penalty of 50% of the RMD amount.
Generally, you must avoid withdrawing funds until at least age 59½, or the IRS will take 10% of the withdrawal as a penalty, with few exceptions. Financial institutions figure out the RMD based on your age, account balance, and other factors.
Certificates of Deposit Withdrawals
Banks often offer certificates of deposit (CDs) as a way for you to earn interest, besides IRA withdrawals. CDs provide higher interest rates than traditional savings accounts because your money stays with the bank for a fixed period. Once the CD matures, you can withdraw the funds, including any interest earned.
To get regular access to your savings, think about setting up a CD ladder, where you create several CDs with different maturity dates. When one matures, you can cash it out or roll it into a new CD.
Penalties for early CD withdrawals are substantial—banks charge based on a number of days' worth of interest. For a 1-year CD, it might be 60 to 270 days' interest; for a 5-year CD, 150 days to 12 months' worth. Some banks take a small percentage, like 1% or 2%, of the principal. These penalties scale with the term length, so longer CDs hit harder.
These penalties don't apply to no-penalty CDs from some banks. Their interest rates aren't as high as standard CDs, but they are fixed.
What Does a Cash Withdrawal Mean?
A cash withdrawal means taking money out of a bank account, usually a checking account, in the form of cash. You typically do this at an ATM or a bank branch.
When Can I Start Taking Money Out of My IRA?
You can start withdrawing from a traditional IRA at age 59½ without penalties. If you withdraw earlier, you'll pay a 10% penalty. For a Roth IRA, you can withdraw your contributions anytime, but earnings only at age 59½.
How Do I Withdraw Money From My Retirement Accounts?
Once you're 59½, you can withdraw from your retirement accounts without penalty. For tax-advantaged plans like traditional IRAs and 401(k)s, you'll owe taxes on the amounts. You just need your account details to start the process and receive funds as you prefer.
The Bottom Line
Withdrawals involve removing funds from financial accounts, such as bank, pension, or retirement accounts. Some have no restrictions, like bank account withdrawals, while others, like certain retirement accounts, have rules on timing. Before you withdraw from any account, check the rules to avoid penalties or fees.
