Jul 16, 2021
What Happens When You Sell From a Retirement Account?
You may owe taxes and penalties on your holdings.
When you set up a retirement account, such as a 401(k), 403(b), and a traditional IRA, it can provide you with some important tax benefits.1
Namely, gains—also called earnings—in traditional retirement accounts grow tax-deferred as long as you don’t make any withdrawals from the accounts prior to age 59 1/2.2 Important note: All investing involves risk, and you can lose money with your investments. Gains are not guaranteed.
What happens if you sell from a retirement account?
But if you sell some of your investments and withdraw the money prior to reaching the age 59 ½, the money you take out will be subject to regular income taxes, plus an additional 10% early-withdrawal penalty. Similarly, if you decide to close the account and sell all of your investments, you may have to pay the same penalty in addition to income taxes on the entire amount.
What about Roths?
There are some exceptions to this rule. Roth accounts are funded with post-tax dollars. You can withdraw contributions you’ve made at any time, without taxes or penalties before retirement age. You may, however, have to pay taxes and penalties if you withdraw any of your earnings prior to a five-year holding period.3
Good to know: The Internal Revenue Service (IRS) may waive the 10% penalty for early withdrawals from retirement accounts if you become permanently disabled, or to pay for medical expenses that exceed 7.5% of your income. Find out more from the IRS here and here.
Follow the Stash Way
Stash encourages you to follow the Stash Way, our investing philosophy which includes investing regularly, and investing for the long run. Planning for retirement is also a critical part of your financial plan. If you must close your brokerage account, consider something called a rollover, which means you transfer your retirement account from one financial institution to another. There aren’t likely to be any tax penalties or consequences for that.
You can learn more about 401(k)s and IRAs here.
1 For retirement, Stash offers access to traditional or Roth IRAs.
2 Withdrawing from a traditional IRA prior to age 59½, generally means you’re subject to income tax and a 10% penalty. Withdrawals after age 59½ are only subject to income tax but no penalty.
3 Withdrawals from a Roth IRA, money (Contributions) you put in are penalty and tax free. Prior to age 59½, withdrawals of interest and earnings are subject to income tax and a 10% penalty. All earnings are tax free at age 59½ or older, assuming your first contribution was more than 5 years prior. Income Eligibility applies.
This should not be construed as tax advice. Please consult a tax professional for additional questions.
How to Start Investing
When To Exercise Stock Options: A Beginner’s Guide
The 12 Largest Cannabis Companies in 2023
How to Invest in Real Estate
How To Invest in the S&P 500: A Beginner’s Guide for 2023
What Is a Real Estate Investment Trust (REIT)?