What is an Early Withdrawal in Finance?

by Investing School on December 10, 2012

When you choose to remove funds from a fixed-term investment before it reaches maturity, or you take funds from a tax-deferred investment or retirement savings account before the term is complete, it is called an Early Withdrawal.

Common examples would be the termination of a CD before it has reached maturity or pulling money from retirement accounts to cover current needs. When an investor opts for an early withdrawal they are breaking the original contract they agreed to by making the deposits.

The real issue with early withdrawals is that they usually come with an early withdrawal fee. The goal of such a fee is to deter regular withdrawals from such accounts. In the case of a retirement account penalties can be particularly severe. Funds withdrawn are subject to immediate taxation as well a any penalty fees the holding institution requires.

There are some circumstances under which an early withdrawal from a retirement account will not incur penalties. For example, there will be no penalties if an individual can show that they have a pressing financial need. The need may be paying for college or financing the purchase of a first home. Under such circumstance there is no penalty for premature withdrawals because it is understood that the holder of the account has a real and pressing need for the funds.

To avoid early withdrawal penalties an individual should read the ‘fine print’ carefully and be aware of which circumstances allow them to make emergency withdrawals. These terms should be clearly stated in the original paperwork. In addition to penalties assessed, especially when withdrawing funds prematurely from a retirement account, the individual loses the interest that would be earned during that time.

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