What is a 'Withdrawal'

A withdrawal involves removing funds from a bank account, savings plan, pension or trust. In some cases, conditions must be met to withdraw funds without penalization, and penalization for early withdrawal usually arises when a clause in an investment contract is broken.

A withdrawal can be carried out over a period of time in fixed or variable amounts or in one lump sum and as a cash withdrawal or in-kind withdrawal. A cash withdrawal requires converting the holdings of an account, plan, pension or trust into cash, usually through a sale, while an in-kind withdrawal simply involves taking possession of assets without converting to cash.

BREAKING DOWN 'Withdrawal'

Some retirement accounts, known as IRAs, have special rules that govern the timing and amounts of withdrawals. As an example, beneficiaries must start taking the required minimum distribution (RMD), or withdrawal, from a traditional IRA by age 70 1/2. Otherwise, the person who owns the account has a penalty assessed equal to 50% of the RMD. On the other hand, an account owner must refrain from withdrawing funds until at least age 59 1/2 or the Internal Revenue Service takes 10% of the withdrawal amount in a penalty. Financial institutions calculate the RMD based on the owner's age, the account balance and other factors.

Statistics Regarding IRAs

In 2013, the IRS compiled statistics about IRAs and people who withdraw money early. During the 2013 tax year, more than 690,000 people paid penalties for early withdrawals, which is much lower than the 1.2 million in 2009. The amount paid in penalties dropped from $456 million to $221 million over that same period. People earning between $50,000 and $75,000, and then $100,000 to $200,000, made the most early withdrawals from IRAs. Despite these huge numbers, retirement accounts are not the only way for investors to earn money on withdrawals at a later time.

Certificates of Deposit

Banks typically offer certificates of deposit as a way for investors to earn interest. CDs draw higher interest rates than traditional savings accounts, but that's because the money stays in the bank's possession for a minimum amount of time. CDs mature after a set amount of time, and then someone can withdraw payments from the account, including any interest accrued during the time period.

In 2015, penalties for early withdrawals from CDs were steep. If someone withdrew early from a one-year CD, the average penalty was six months of interest. For a five-year CD, the typical penalty was 12 months' interest. If someone withdrew money early from a three-month CD, the penalty included the entire three months of interest accrued in the account. Some penalties from banks dipped into taking a small percentage, such as 1 or 2%, of the principal amount invested in a CD. Banks assess early withdrawal penalties proportional to the time an investor must leave the money in the account, which means a longer-term CD gets a higher penalty.

RELATED TERMS
  1. Withdrawal Penalty

    A withdrawal penalty is a penalty or extra charge incurred by ...
  2. Certificate Of Deposit - CD

    A certificate of deposit (CD) is a savings certificate entitling ...
  3. Early Withdrawal

    The removal of funds from a fixed-term investment before the ...
  4. Time Deposit

    A time deposit is a savings account or certificate of deposit ...
  5. Notice Of Withdrawal

    A notice of withdrawal is a notice given to a bank by a depositor, ...
  6. Dynamic Updating

    Dynamic updating determines how much can be withdrawn from retirement ...
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. Financial Advisor

    Best Ways to Avoid RMD Tax Hits on IRAs

    If you want to avoid hefty tax penalties, read this cheat sheet on IRA required minimum distributions.
  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. Retirement

    Everything Retirees Need to Know About IRA RMDs

    When you reach age 70.5, you will need to begin taking RMDs from your tax-deferred accounts.
  6. Retirement

    Which Retirement Income Tax Strategy Is Right for You?

    Here are four retirement income withdrawal strategies to consider before you retire.
  7. Retirement

    Tapping Retirement Funds Early – Without a Penalty

    The IRS offers several ways to skirt the 10% penalty on early retirement distributions.
  8. Financial Advisor

    The 4% Withdrawal Rule: One Size Fits All?

    The 4% rule for retirement withdrawals has been a staple in financial planning for over 20 years, but no rule of thumb or approach is one size fits all.
Trading Center