Withdrawal: Definition in Banking, How It Works, and Rules

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 a penalty. A penalty for an early withdrawal usually arises when a clause in an investment contract is broken.

Key Takeaways

  • A withdrawal involves removing funds from a bank account, savings plan, pension, or trust.
  • Some accounts don't function like simple bank accounts and carry fees for the early withdrawal of funds.
  • Both certificates of deposit and individual retirement accounts deal with withdrawal penalties if the accounts are withdrawn before the stipulated time.
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How to Manage Retirement Account Withdrawals

How a Withdrawal Works

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 them to cash.

Retirement Account Withdrawals

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 73 if they were born between 1951 and 1959 or 75 if they were born in 1960 or after. Otherwise, the person who owns the account incurs a penalty equal to 50% of the RMD.

On the other hand, with few exceptions, an account owner must refrain from withdrawing funds until at least age 59½ 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.

Certificates of Deposit Withdrawals

In addition to an IRA withdrawal, banks typically offer certificates of deposit (CD) 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.

A withdrawal can be carried out over a period of time in fixed or variable amounts or in one lump sum.

Penalties for early withdrawals from CDs are 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.

What Does a Cash Withdrawal Mean?

A cash withdrawal refers to taking money out of a bank account, usually a checking account, in the form of cash. This is typically done at an ATM machine or at a physical location of a bank.

When Can I Start Taking Money Out of My IRA?

You can start taking money out of a traditional IRA at the age of 59½ without any penalties. If you take out money before then, you will incur a 10% early withdrawal penalty. You can take money out of a Roth IRA at any time, but only the amount you have contributed, not any earnings. Earnings can be taken out at age 59½.

How Do I Withdraw Money From My Retirement Accounts?

When you are 59½ you may begin withdrawing money from your retirement accounts without penalty. Note that for tax-advantaged plans, such as traditional IRAs and 401(k)s, you will need to pay taxes on the amounts withdrawn. Aside from that fact, you just need your account information to be able to begin withdrawing and receiving your funds in the manner of your choosing.

The Bottom Line

Withdrawals are the removal of funds from a specific financial account, whether that be a bank account, pension account, or retirement account, to name but a few. Some withdrawals don't come with any stipulations, such as taking money out of your bank account, while others, such as some retirement accounts, have set rules on when money can be withdrawn. Before taking out money from any of your accounts, make sure you are following the rules to avoid any penalties or fees.

Article Sources
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  1. Congress.gov. "One Hundred Seventeen Congress of the United States of America," Page 831."

  2. Internal Revenue Service. "401(k) Resource Guide Plan Participants - General Distribution Rules."

  3. Internal Revenue Service. "IRA FAQs - Distributions (Withdrawals)."