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How to Cash Out An IRA

Life isn't always predictable and even though retirement accounts are meant to secure a longtime financial future it's nice to have the resources available should certain situations present themselves. Individual Retirement Accounts can be cashed out like standard accounts such as brokerage accounts or mutual fund accounts but depending on the type of IRA there might be penalties or other tax implications based on the type of IRA, the age of the account holder and whether there are qualifying exemptions.

Since an IRA is a type of designation applied to standard accounts they can be cashed out similar to a brokerage account or other investment account however additional forms may be required for filing with the Federal Government. It might be beneficial to contact the financial institution which is the custodian of the IRA to clarify what forms might be required to cash out an account.

When cashing out an IRA, certain companies will handle the sale of the underlying assets for you and others will not. For example, if a mutual fund IRA is liquidated then the underlying shares will be sold automatically once the forms are filled out and paperwork processed. A brokerage based IRA which may own shares of stock must have the underlying stock holdings sold first and then a waiting period of between 3 to 5 days must transpire for the sale transactions to clear before an IRA can be cashed out.

If the IRA is being liquidated for roll over into an IRA at another financial institution it might be better to conduct a transfer. Contacting the institution where the funds will be moved and filling out their forms will allow them to process the account closure for you. If more control of the process is required to determine a new financial institution then IRA proceeds can still be closed and a check cut which would then need to be deposited into a new qualifying IRA account within 60 days to avoid penalties in taxes.

Sometimes the goal is not to roll over an IRA and transfer the funds to a new financial institution but only to use some of the resources for other purposes such as buying a home or paying for medical expenses. If early disbursements are used according to Federal guidelines then the 10% early withdrawal penalty and earned income taxes may not apply. Go to the IRS.gov web site or speak with an accountant or tax professional to determine if your situation qualifies for the Federal exemptions for early withdrawals from an IRA.

Qualifying IRA exemptions for early withdrawal include payment of medical expenses that exceed 7.5% of adjusted gross income, funds utilized in the purchase of a first time home, qualifying medical disability, and qualifying higher education expenses. As always conduct through research to determine if the disbursement fits one of the qualifying exemptions.

An important distinction lies between the differences in a Traditional IRA and Roth IRA in that early withdrawals are not taxed on a Roth IRA as they already been taxed as earned income. The full amount on a Traditional IRA will be subject to the 10% penalty and earned income tax because a tax benefit was received when the contribution was made to the Traditional IRA.

As with any financial decision with tax, penalty and other financial implications it is important to understand what is involved, how it applies to your situation and what the ramifications may be. Speaking with an investment or tax professional may help in the decision-making process. Cashing out an IRA is fairly easy and usually only requires filling out a few forms but the financial consequences may not be worth it in the long run unless absolutely necessary.