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For those who wish to invest in not just one type of share but for different kinds of securities, Mutual Funds are the option. The portfolio of your investment is created according to your investment goals. Mutual funds are generally long-term investments and savings for their retirement for some. However, investors may decide on a premature withdrawal due to unavoidable circumstances.
Can You Withdraw Money From a Mutual Fund Without Penalty?
Yes, you can withdraw money from a mutual fund without penalty. However, an “early withdraw” tax penalty can occur very rarely, depending on the class of assets in your mutual fund portfolio and their liquidity.
When you withdraw from your mutual funds, you sell the stocks or bonds of your portfolio. Selling certain kinds of stocks can incur some charges.
Read this article to find out all the essential aspects of withdrawing from mutual funds. In addition, you will know how you can make the withdrawal and the possibility of penalties.
Ways To Withdraw Mutual Fund Investments
There are two ways through which you can withdraw your mutual fund investment. First, if you are the direct owner of the shares, you can process the withdrawal with the help of a broker. Also, you can use your fund manager to process it for you.
Let’s find out about these two options in detail.
- Sell Through a Broker or Company
If you directly own the mutual funds and through an IRA account, then a broker or the mutual fund’s company can assist you in selling the shares. They will place the sell order on your behalf and help with the transactions. However, even if you don’t wish to go to a broker, you can sell the shares online. The online order entry system is easy, and you can do it on your own instead of handing everything over to a broker.
- Selling Through a Fund Manager
If you do not hold your funds directly, the first step is to contact the mutual fund’s company. Since there are penalties involved with certain types of accounts ( like IRA ), connecting with the company is essential to know if that is the situation with your investments. Another critical information that you can get from the fund manager is the class of shares included in your portfolio.
Understanding the class of shares in your portfolio helps you understand the minimum time you must own the shares. For example, if you purchased these shares 6 years ago, you don’t have to worry about it. Therefore, you can proceed towards placing the sell order.
If your mutual fund investment is made through an Individual Retirement Account (IRA), you should connect with your fund’s trustee. The trustee is the custodian of the mutual funds, and it must make sure that the funds and interests of all the investors are protected.
There are chances that your employer will invest your funds in a 401k account. To sell your shares through such an account, get in touch with your company’s Human resource department to talk about the process of cashing out your funds and the expenses involved.
How Long After Investing Can You Make a Withdrawal?
You can make a withdrawal within 24 hours after investing in the mutual funds. Since mutual funds are highly liquid, there is no such limitation on the time of making the withdrawal. It all depends upon your mutual fund company. They must have enough funds to drive sales and repurchases available daily.
Not all the assets in your portfolio have the same level of liquidity. Some assets are highly liquid and can process withdrawals swiftly, without any penalties. However, certain investments with very low liquidity may impose penalties if you go for an early withdrawal. You can always read about the withdrawal facilities in the marketing brochures of the mutual funds.
How Long Does It Take To Get Cash After a Sell Order Is Placed?
A minimum period of three days is required for the settlement of the stocks in mutual funds. After placing a sell order on your mutual fund’s investment, you will have to wait three business days to receive the cash. However, it is different in the case of IRAs. There is no definite period for receiving the cash, but you can contact your mutual fund’s trustee to know the expected period.
What Are the Possible Causes of Penalties in Withdrawal of Mutual Funds?
There are a few cases in which you will pay penalties for withdrawal of mutual funds, not necessarily always. It depends upon the class of assets in your mutual fund portfolio and their liquidity. Specific tax penalties can also be imposed on such withdrawals.
The following are the possible situations where penalties may be imposed on mutual funds withdrawal.
Withdrawal Before Retirement
Many Individual Retirement Account (IRA) holders invest in mutual funds to secure some funds for their retirement and gain tax benefits on IRAs. The age limit set to make any available withdrawal from the investments made through IRA accounts is 59 and half years, 59 years, and 6 months. Any withdrawal made before that is subject to a 10% penalty.
Another drawback of this type of withdrawal is the tax imposition. Profits made through sales of mutual funds before the stipulated age limits will be taxed according to the income tax rates. One thing to note here is that the gains from the sales of mutual funds are not considered capital gains in this situation. In such a case, you may pay a significant amount of tax if your income tax rate is within a higher bracket.
The tax is not the loss. However, if the mutual funds are equal to or less than two years mature and were purchased in a Simple Individual Retirement Investment plan, the 10% penalty is increased to 25%. Therefore, it is advisable to always calculate these losses before making the withdrawal to ensure you are not losing more than what you are gaining.
Different Classes of Shares
Shares can be classified into different classes, A, B, and C. These shares have additional features and various penalties for early withdrawals. So let’s talk about class A and class B shares first.
The yearly maintenance of Class A and Class B shares is cheaper than that of Class C. However, if you wish to go for an early withdrawal of Class A and Class B shares, a sales commission is charged, which is generally 3-5% of your investment. However, these shares can also be purchased at Net Asset Value (NAV), including no sales charge. This can be done when your investment accounts for no less than $1million.
Apart from purchasing at NAV, there could be other conditions that you may have to fulfill to waive off this commission. For example, your mutual fund company usually instructs you to maintain the investment for a minimum holding time. This time is generally 6 years in the case of Class B shares and one year for Class A shares. Therefore, if you decide to make the withdrawal before completing the respective period, you must be ready to lose 3-5% of your investment as a fee for early withdrawal.
The Class C shares are called level load shares, and their yearly maintenance is expensive. They can be purchased at 1% cost, and their early withdrawal may come with a fee, but not necessarily. Any withdrawal made before one year of the purchase is subject to an early withdrawal fee of 1%. However, most mutual fund companies do not charge any fees on this share class.
When can you withdraw from the mutual fund without penalty?
The penalties for early withdrawal are not a necessary condition. There are certain situations where the 10% penalty on withdrawal before retirement can be waived.
The following are the cases where the early redemption penalties are waved off fully or partially, depending upon certain factors.
- If you withdraw to meet the education expenses of one of your immediate family members.
- If you become disabled and need funds to cover expenses.
- If you withdraw to meet your medical expenses.
- Suppose you are 55 or above and lose your job. However, the funds will be taxable.
- If you withdraw to purchase a home.
Ideal Period To Hold Your Mutual Funds
If you do not want to lose much on your investments, then the ideal time to retain your investment in mutual funds is 6 years. The general retaining period for most stocks is one year. However, keeping the different classes of shares, you can avoid maximum penalties if you retain them for at least 6 years.
Making a withdrawal from your mutual fund’s investment is not difficult. The only drawback is the penalties involved in specific scenarios, like investing in an Individual Retirement Account (IRA). Therefore, it is essential to contact a broker, the mutual fund company, or the fund’s trustee to gain all the necessary information regarding your investment and the consequences or benefits of early withdrawal.
Selling your shares does not take long, but it is essential to make sure you are not losing more than what you are getting. Therefore, make sure you retain your investments for the minimum stipulated period. However, some unexpected circumstances require liquid funds, and to meet such needs, you may have to give up your assets at a specific cost as a penalty.