Getting your money out of an individual retirement account can be costly. Whether you’ve retired early and are ready to access your money, or want to change investment vehicle, or have some pressing reason for surrendering your IRA, you may be subject to penalties. Many investment companies include charges or penalties for surrender on their IRAs, and the Internal Revenue Service may levy tax penalties as well.
Early Surrender Penalties
Some IRA plan administrators, especially insurance companies that offer annuities structured as IRAs, make forecasts assuming that plan participants will keep their investments in the plan for a number of years. To secure the long-term needs of the plan, some administrators charge surrender penalties based on the length of time invested. For example, a plan may charge 5 percent for withdrawals in the first year, 4 percent for withdrawals in the second or third year, 3 percent for withdrawals in the fourth or fifth, and 1 percent for withdrawals in the sixth and seventh years.
Many stock- or mutual fund-based IRA plans charge withdrawal or broker fees on any transaction, including surrenders. Typically these surrender charges are flat fees, although a single surrender may incur a number of fees, such as a broker fee, a check writing fee, and an account closing fee. A schedule of fees should be included in the plan prospectus and be available on request.
When you surrender an IRA, you must pay taxes on the funds you receive. There are ways to avoid paying taxes on an IRA you surrender if you are putting the funds into a different qualified account, such as another IRA. Additionally, if you surrender your IRA and you are younger than 59 1/2, then your withdrawal will be subject to a 10-percent tax penalty by the IRS.
Ways to Avoid
Plan administrators may offer to waive surrender penalties under certain conditions. For example, an annuity administrator may provide a surrender charge waiver on withdrawals up to a specified amount, such as 10 percent of the account balance. Tax penalties can be avoided, as well, even if you are under age 59 1/2 when you surrender the annuity, if your withdrawal meets strict IRS guidelines, such as to use the money for the purchase of your first home, or to pay for qualified educational expenses.
- U.S. Securities and Exchange Commission: Variable Annuity Surrender Charges
- U.S. Securities and Exchange Commission: Mutual Fund Fees and Expenses
- U.S. Securities and Exchange Commission. "Fast Answers: Variable Annuity Surrender Charges." Accessed Aug. 30, 2020.
- State of Idaho Department of Insurance. "Bulletin No. 20-11," Page 4. Accessed Aug. 30, 2020.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.