DEFINITION of 'Withdrawal Penalty'

Refers to any penalty incurred by an individual for early withdrawal from an account that is either "locked in" for a stated period, as in a time deposit at a financial institution, or where such withdrawals are subject to penalties by law, such as from an IRA. The penalty can be either in the form of forfeiture of interest or an actual dollar amount.

BREAKING DOWN 'Withdrawal Penalty'

For example, an early withdrawal from a certificate of deposit at most financial institutions would result in the customer forfeiting interest for a period ranging from one month to several months. Generally speaking, the longer the term of the initial certificate of deposit, the longer the interest forfeiture period. In the case of IRAs, withdrawals before the age of 59.5 are subject to a penalty of 10%.

RELATED TERMS
  1. Withdrawal

    Removing funds from an account, plan, pension or trust. In some ...
  2. Hardship Withdrawal

    An emergency withdrawal from a retirement plan that may be subject ...
  3. Time Deposit

    A savings account or certificate of deposit (CD) held for a fixed-term, ...
  4. Term Deposit

    A term deposit is a deposit held at a financial institution that ...
  5. Nonpersonal Time Deposit

    Time deposit accounts held by corporate bank customers that pay ...
  6. Demand Deposit

    Funds held in an account from which deposited funds can be withdrawn ...
Related Articles
  1. Retirement

    The Cost of Tapping Your Retirement Accounts Early

    It only makes sense in some situations to tap into retirement accounts early as a last resort.
  2. Retirement

    Your 401(k): Not the Best Emergency Fund

    If you have an emergency and need to access your retirement funds, you may have to pay a penalty if you dip into your 401(k). But there is a better option.
  3. Retirement

    How Much Are Taxes On An IRA Withdrawal?

    Taxes on an IRA withdrawal depend on the type of IRA, your age, and the purpose of the withdrawal.
  4. Retirement

    What's the Tax Hit on an IRA Withdrawal?

    How much taxes you'll pay on IRA withdrawals depends on a variety of factors. Use this guide to plan ahead.
  5. Taxes

    How 401(k) Withdrawals Work When You're Unemployed

    Unemployed individuals can pursue several options when taking money out of their 401(k), but they should carefully weigh taxes and possible penalties
  6. Retirement

    Can You Afford To Retire Early?

    Early retirement is the hope of many people currently in the workplace. So, how do we get there - and what are the downsides?
  7. Retirement

    Foreign Citizen Alert: How Are Your 401(k) Withdrawals Taxed?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  8. Financial Advisor

    How IRA Dividends Are Taxed

    Money in an IRA isn’t taxed until retirement, but its funds receive different tax treatment once money is withdrawn.
  9. Retirement

    When a 401(k) Hardship Withdrawal Makes Sense

    If you've exhausted all other avenues, there are ways to withdraw funds before age 59½ – sometimes without the 10% penalty that's usually due.
  10. Retirement

    5 Secrets You Didn’t Know About Traditional IRAs

    A traditional IRA gives you complete control over your contributions, and offers a nice complement to an employer-provided savings plan.
RELATED FAQS
  1. When can I withdraw my IRA money?

    Managing an individual retirement account can be tricky. Find out when you can withdraw IRA money without incurring a 10 ... Read Answer >>
  2. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    Find out how to calculate the tax penalty on early IRA distributions, including why distributions from Roth accounts can ... Read Answer >>
Hot Definitions
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  6. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
Trading Center