How to Terminate a Mutual Fund IRA

by Ciaran John, studioD

Many people choose to invest their Individual Retirement Arrangement contributions in mutual funds. You can redeem your mutual fund shares at any time by selling the shares back to the fund company. However, when you sell shares within an IRA, you have to contend with tax complications. IRAs grow tax deferred, but you have to pay tax if you close your account. You can avoid paying taxes by rolling the cash from your liquidated fund shares into another type of IRA, although you only have 60 days to complete such a transaction.

Locate your most recent mutual fund statement and go to your bank or investment firm to speak with an investment representative. Identify yourself with a form of identification such as your driver's license and provide any other information that the representative requires, such as your Social Security number. Give the mutual fund account number to the representative and instruct the representative to sell your shares and to close your IRA. You can either liquidate your account and transfer a lump sum or sell shares periodically over a period of time to reduce the risk of selling all the shares at a lower price. If you roll the money to a new IRA, you must complete the transfer within 60 days of selling each batch of shares.

Tell the representative whether you want the custodian to hold back a portion of your withdrawal to cover taxes. Funds kept by your custodian to cover your taxes are known as a "withholding." If you prefer to pay your taxes at the end of the year, you can opt to have your custodian withhold nothing. However, unless you instruct otherwise, then your IRA custodian has to hold back 10 percent to cover federal tax. Additionally, some state governments require IRA custodians to withhold funds to cover state income tax.

Ask the representative if you have to pay any fund redemption fees for selling your shares. If you own class A mutual fund shares then you paid a fee when you bought your shares, but pay nothing when you redeem the shares. You do pay a commission known as a load fee if you sell class C shares within 12 months of purchase, and you pay a load fee if you sell class B shares within seven years of purchase.

Tell the representative how you want the funds disbursed. Most brokers give you the option of having a check mailed to you for free, or of paying a fee to have the funds wired to your bank or money market account. Fund trades occur after the stock market closes for the day and it normally takes at least a few days for you to receive the funds. If the market experiences a drop on the day that you happen to sell your shares, you could lose a good deal of money. Therefore, many people prefer to sell shares incrementally over a period of weeks or even months to reduce the likelihood of selling all of the shares during a market downturn.


  • Mutual funds contain numerous securities and the value of a mutual fund depends on the overall value of the underlying securities at the close of the market. The sale price of your shares depends on the value of the fund as a whole. Therefore, you only find out how much your shares are worth after the sale transaction actually occurs because you have to submit your sale request before the market closes for the day.


  • If you cash in an IRA before reaching the age of 59 1/2, you normally have to pay a 10 percent tax penalty, although you can make penalty-free withdrawals in certain other situations. For example, if you liquidate the account to pay for a non-reimbursed medical treatment, you will not owe a penalty. If you do not complete an IRA rollover within 60 days, then you must accept the money as income for the current year and pay all applicable taxes and tax penalties.

About the Author

Ciaran John began writing in 1994 with contributions to "The Hourly Press" and "The Sawbridgeworth Observer," and has since written for many online and print publications. He has 12 years experience working for financial services companies as a business banker, lender and investment representative and spent four years working in human resources.

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