What Is the Penalty if You Close an Investment Account?

by Leslie McClintock

The penalty for closing an investment account depends on the language in your contract with the investment company and on whether or not the investment is in a tax-advantaged account, such as an IRA. In addition to contractual penalties, closing an investment account and liquidating assets may have tax consequences.

Contractual Penalties

Some mutual fund companies impose a withdrawal fee of up to 2 percent on withdrawals within a certain period of time. They do this to discourage market-timers, because rapidly moving money in and out of a fund increases expenses and inconveniences other shareholders.

Surrender Charges

If you purchase an annuity, you don't pay a front-end load for the investment, in most cases. But you may be on the hook for a surrender charge for the first three to 15 years you are involved in the annuity. The annuity company does this to ensure that it recoups the investment it makes in marketing and selling the annuity to you and compensating the agent.

Capital Gains Taxes

If you liquidate an investment at a profit, you may have to pay capital gains taxes on the proceeds. If you held the investment for less than a year, your capital gains tax will be the same as your highest marginal income tax bracket. If you held the investment for a year or more, you may qualify for long-term capital gains tax treatment. These rates are lower than long-term rates for each bracket and vary from 0 percent to 15 percent, as of 2011. Assets held in retirement accounts or other tax-advantaged accounts are exempt from capital gains tax as long as the money remains in the account.

Other Considerations

If you liquidate a traditional IRA or 401(k) account, you will have to pay any income taxes due. 401(k) plans will withhold 20 percent of the funds and send them to the IRS to pay income taxes. IRAs will not withhold but send you the entire amount. Assets held in Roth IRAs for more than five years are tax free. If you are under age 59 1/2, a 10-percent penalty may apply, except in certain hardship circumstances. You can close an investment account and move the funds to another IRA without a tax penalty, but you may still be subjected to any contractual penalties from the old account.