A liquid asset is cash or any asset that can be converted to cash quickly and at a reasonable rate. On the other hand, Individual Retirement Accounts (IRAs) are special accounts that are designed to set aside money for retirement.
Since the account holders of these accounts under the tax-designated retirement age must pay penalties to access these funds, IRAs are not generally regarded as liquid assets. However, some of them serve as vehicles through which retirees who invest their monies may enjoy a high degree of liquidity.
Traditional vs. Roth IRAs
Traditional IRAs contain pre-tax earnings, so when account holders withdraw their funds, the Internal Revenue Service taxes both the principal and account earnings. On the other hand, Roth IRAs include after-tax funds, so the IRS does not tax principal withdrawals.
It’s also worth noting that 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Anyone below that age who withdraws money from a traditional IRA must pay a 10 percent tax penalty on the entire amount withdrawn.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 before age 59-1/2 must pay a 10 percent penalty tax on the earnings but not principal withdrawals.
However, some people may be able to withdraw their retirement income under certain circumstances before they meet the minimum age requirement.
For example, if you have medical expenses exceeding 7.5 percent of your adjusted gross income and your health insurance will not reimburse you for them, your IRA distributions will not be taxed. Also, if you need to pay college expenses, such as tuition, books, and equipment, your early withdrawals will not be subject to taxation.
Certificate of Deposit IRAs
Many investors buy certificates of deposit (CDs) 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 before 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.
Use of IRA Annuities
Annuities are insurance contracts designed to create a lifetime income stream for retirees. There are two main types of annuities: deferred and immediate annuities.
Deferred annuities begin with a surrender period lasting up to 10 years, during which contract holders must pay substantial penalties to access funds. For that reason, they are not liquid assets.
However, immediate annuities involve a contract holder making a single premium payment to an insurance company in exchange for monthly income payments that begin almost immediately.
The payments begin the following month, but the annuitant cannot access the lump sum used to fund the contract. That makes them a liquid asset from the moment the payments begin and for as long as they last.
Liquid Assets in IRAs
People over the age of 59 1/2 do not have to pay taxes on withdrawals made from Roth IRAs, making it an excellent vehicle for anyone who wants to improve financial liquidity. Many banks offer Roth IRA savings accounts from which account holders can make up to six withdrawals per month.
Typically, the withdrawal of contributions is both tax-free and penalty-free. However, the earnings within the IRA could be accompanied by penalties if one has held the account for less than five years.
However, while other IRAs could contain liquid assets, such as stocks, bonds, and mutual funds, they are not as liquid. That is because, even though the investor can accept the penalty and sell the securities before retirement, fees are involved, and it takes a few days before funds are received.