Namely, gains—also called earnings—in traditional retirement accounts grow tax-deferred as long as you don’t make any withdrawals from the accounts prior to age 59 1/2.2 Important note: All investing involves risk, and you can lose money with your investments. Gains are not guaranteed.
What happens if you sell from a retirement account?
But if you sell some of your investments and withdraw the money prior to reaching the age 59 ½, the money you take out will be subject to regular income taxes, plus an additional 10% early-withdrawal penalty. Similarly, if you decide to close the account and sell all of your investments, you may have to pay the same penalty in addition to income taxes on the entire amount.
What about Roths?
There are some exceptions to this rule. Roth accounts are funded with post-tax dollars. You can withdraw contributions you’ve made at any time, without taxes or penalties before retirement age. You may, however, have to pay taxes and penalties if you withdraw any of your earnings prior to a five-year holding period.3
Good to know: The Internal Revenue Service (IRS) may waive the 10% penalty for early withdrawals from retirement accounts if you become permanently disabled, or to pay for medical expenses that exceed 7.5% of your income. Find out more from the IRS here and here.
Follow the Stash Way
Stash encourages you to follow the Stash Way, our investing philosophy which includes investing regularly, and investing for the long run. Planning for retirement is also a critical part of your financial plan. If you must close your brokerage account, consider something called a rollover, which means you transfer your retirement account from one financial institution to another. There aren’t likely to be any tax penalties or consequences for that.
You can learn more about 401(k)s and IRAs here.