How to Convert an IRA Into Cash

The purpose of an Individual Retirement Arrangement (IRA) is to build a nest egg to help finance your golden years. There may be times when you want to convert all the assets in your IRA to cash, and that usually is easy to do, but it requires careful consideration as to whether it’s a good idea or not.

​READ MORE​: Differences Between IRA & Non-IRA Accounts

Virtually all IRAs give shareholders online access to their accounts. The IRA may reside with a mutual fund, brokerage or some other approved custodian. In fact, you can own multiple IRAs with multiple custodians, each with online access.

In most cases, you can go online to contribute new money to your IRA, purchase new assets, sell existing holdings and request withdrawals. Typically, your IRA will include some kind of money market funds (also called a cash reserves account) that holds cash not invested in other assets.

These money market funds contain the money you use to make purchases and hold the proceeds from your sales. You may also direct your interest, dividends and/or capital gains into your money market fund.

​READ MORE​: Money Market Funds vs. Fixed-Income Funds

Normally, you can simply sell your securities (e.g., stocks, bonds, exchange-traded funds (ETFs) and mutual funds) through the IRA’s online portal. Depending on the type of security, the sale can occur instantly when the market is next open, or at the end of the current trading day.

Once sold, a settlement process occurs that should deposit your proceeds into your cash reserves account within two days. The cash in this type of account is actually invested in money market fund shares that have a net asset value (NAV) of ​$1​ each. The shares earn interest and, in most cases, are insured against loss.

However, the NAV of $1/share is not guaranteed, and there have been rare cases where money market funds have “broke the buck,” that is, had their NAVs drop below ​$1​. While this is usually not something to worry about, it can become a concern during times of great financial stress.

Selling securities in a brokerage account may incur commissions and taxes. Moreover, shares in mutual funds may be subject to a deferred sales fee as high as ​8.5 percent​ plus a separate redemption fee. In many cases, mutual funds offer several classes of shares with different fee structures, so it’s important to know the possible charges you’ll face before you commit your money.

Another possible sales-related risk is illiquidity, which is the difficulty in finding a buyer for your securities at current prices. If you simply send in an open order to sell you stock shares, you’ll be matched to the current highest bid, which in an illiquid market may be well below that price at the previous sale.

This isn’t a problem with open-ended mutual funds because the fund company creates and cancels shares at the NAV. However, illiquidity can occur with stocks, bonds, ETFs and other investments, especially for the securities of small or obscure companies.

​READ MORE​: Objectives of Mutual Funds

You can protect yourself from an unexpected low sales price by placing a limit order instead of an open order. A limit order sets the minimum price you’ll accept when selling securities, and you can specify limit orders when you enter online trade instructions.

From a long-term viewpoint, perhaps the biggest risk in turning your investments into cash is that the interest you earn will probably not keep up with inflation and the growth of your IRA’s value will be stymied. Unless you are close to retirement, consider the risk of bailing out of your investments during a down market and then having to buy back into the market after prices have recovered. Unfortunately, trying to time the market can result in selling low and buying high, not a prescription for long-term success.