How Much Penalty Do I Pay for Taking Investment Money Early?

by Maggie McCormick

Although the money you invest is technically your money, getting it out of your accounts may incur taxes, penalties and fees. Some of these penalties are straightforward, while others are more difficult to estimate. Before you withdraw money, consider the effect that it will have on your finances to determine if it's a smart move.

Retirement Investments

In most cases, the money in your retirement accounts is meant for your retirement, and the government penalizes you for withdrawing this money before you turn 59 1/2, except in certain cases. If your money is in a traditional IRA or a 401k account, expect to pay a 10 percent penalty charge on your withdrawals in addition to taxes. However, if you're withdrawing from a Roth IRA, only pay the 10 percent penalty on the earnings.

Penalty-Free Exceptions

IRAs allow you to withdraw money in certain cases without penalties. With a Roth IRA, you can withdraw your contributions penalty free at any time, and up to $10,000 of the earnings without penalty to buy a first home. The traditional IRA allows you to take penalty-free withdrawals for purchasing a home, paying higher education expenses, back taxes, or health insurance if you're unemployed and have certain medical expenses.

Other Investments

If you have investment accounts outside of your tax-deferred retirement accounts, you still have to pay taxes on money received at the capital gains tax rate. In addition to this, your brokerage probably charges you fees for transactions, although these are probably minimal.

Market Losses

When you sell your investments at a loss, you're losing out on any potential recovery that this money may have had if you had left it in the account. Fortunately, you can take tax deductions for these losses, up to $3,000 and spread it out indefinitely over multiple years if you lost more than this amount in one year.

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