Individual Retirement Accounts (IRAs) are designed to set aside money for retirement, and account holders under the tax-designated retirement age must pay penalties to access these funds. Therefore, IRAs are not generally regarded as liquid assets although people who are already retired who invest their IRA money into certain kinds of accounts may enjoy a high degree of liquidity.
Traditional Versus Roth
Traditional IRAs contain pre-tax earnings so when account holders withdraw funds the Internal Revenue Service taxes both the principal and account earnings. Roth IRAs contain after-tax funds so the IRS does not tax principal withdrawals. The IRS uses age 59-1/2 as the official retirement age for tax purposes. Anyone below that age who withdraws money from a traditional IRA must pay a 10 percent tax penalty on the entire amount withdrawn. People who make Roth withdrawals prior to age 59-1/2 must pay a 10 percent penalty tax on the earnings but not principal withdrawals.
Certificate of Deposit IRAs
Many investors buy certificates of deposit with IRA money. CDs have terms lasting between a few days to several years and are illiquid because banks assess penalty fees if people make withdrawals from CDs prior to the account maturity date. Penalty fees vary from bank to bank but typically amount to six months of interest or more. The bank penalties are in addition to tax penalties that people under the age of 59-1/2 must pay to the IRS.
Annuities are insurance contracts designed to create a lifetime income stream for retirees. There are two main types of annuities: deferred and immediate. Deferred annuities begin with a surrender period lasting up to 10 years during which contract holders must pay substantial penalties to access funds. Immediate annuities involve a contract holder making a single premium payment to an insurance company in exchange for monthly income payments. The payments begin the following month, but the annuitant cannot access the lump sum used to fund the contract. Therefore, IRA annuities are illiquid.
People over the age of 59-1/2 do not have to pay taxes on withdrawals made from Roth IRAs. Many banks offer Roth IRA savings accounts from which account holders can make up to six withdrawals per month. These IRA savings accounts are the most liquid type of IRA that anyone can own. IRAs containing stocks, bonds and mutual funds are not as liquid because, even though the investor can sell the securities at any time, fees are involved, and it takes a few days before funds are received.