Fixed individual retirement accounts usually take the form of certificates of deposit (CDs). You can cash in an IRA CD at any time because the money in the account belongs to you. Nevertheless, your bank can charge penalty fees if you liquidate your IRA before the CD reaches maturity. IRAs provide a tax shelter for your retirement funds, and you expose your money to federal and state income taxes when you cash in your account. You have to pay a 10 percent tax penalty if you do not make what the Internal Revenue Service regards as a qualified withdrawal.
Read your fixed-IRA contract to see when your account reaches maturity. CD IRA terms can last for days, weeks, months or years, and you usually have a seven- to 10-day grace period at the end of the CD term during which you can make penalty free withdrawals. However, some so-called option CDs also have a provision that enables you to make occasional penalty free withdrawals prior to the maturity date.
Take your CD IRA contract to the nearest branch or account trustee and tell a customer service representative that you need to cash in the account. Show the banker identification to prove that you are the account owner. You can request to have the account proceeds disbursed as cash or in the form of a check, although your bank may require prior notice for a cash disbursement if your IRA contains $5,000 or more.
Tell the banker not to withhold any money to cover federal income tax, if you want to wait until the tax year ends before you pay taxes on the withdrawal. In some states, the custodian may have to withhold some of the money to cover the mandatory state income tax withholding. If you request to have taxes withheld for federal income tax, then the custodian normally withholds 10 percent of the disbursement. However, you can instruct the custodian to withhold more if you fall into a higher tax bracket.
Ask for a transaction receipt that includes details of any taxes withheld, as well as any penalty fees that the custodian charged if you made the withdrawal prior to the CD IRA reaching maturity. Count your cash, or review the disbursement check for accuracy before you leave the financial institution.
If you cash in an IRA within one week of first establishing the account, then federal tax laws prevent the IRA custodian from imposing any penalties that deplete your principal. However, you lose any interest that had accrued on the account. Beyond the first week, financial institutions can impose premature withdrawal penalties that can deplete the principal and the interest. While penalty fees are commonly imposed, financial institutions have the option to waive these early surrender fees.
When you reach age 70 1/2 you must start taking required minimum distributions from your retirement accounts. Otherwise, you will have to pay a 50 percent penalty tax on the amount that you should have withdrawn.
- Bankers Online; IRA Withdrawals Before CD Maturity; David Dickinson; May 2005
- Bankrate.com; One Way to Avoid Early IRA Withdrawal Penalty; George Saenz; November 2010
- Bankrate.com; Early Withdrawal can Erase Earnings, Drain Principal; Laura Bruce; August 2001
- IRS.gov; Retirement Plans FAQs regarding Required Minimum Distributions; June 2011