What Is the Penalty if You Close an Investment Account?

Investing differs from saving in that while saving often focuses on the short-term and something specific, investing helps you achieve more general long-term financial goals. The patience to wait and a long time frame is crucial to a successful investment strategy. Closing an investment account either before your investments have matured or in advance of the redemption date not only affects your wallet but can also affect how long it ultimately takes to achieve your long-term goals.

Penalty Fees

Monetary penalties can include surrender or early withdrawal fees and interest penalties. Although how much you are charged for closing an investment account depends on the type of investment, penalties apply when you close most every type of investment. For example, surrender fees of about 6 percent to 7 percent of your total investment may apply if you close an annuity within the first few years of setting up the contract or before the surrender period is over. If you close out a certificate of deposit before its maturity date, an interest penalty that can erase months of built-up interest will apply.

Income Tax Penalties

Closing an employer-sponsored retirement plan -- such as a 401(k), a 403(b) or a Traditional IRA account -- can also be costly. Expect both a 10 percent penalty fee and an income tax assessment according to your current income tax bracket if you withdraw a portion of your investment without a qualifying reason or close a tax-free retirement account completely before reaching 59 1/2 years of age. You can withdraw up to the basis, the amount you originally invested in a Roth IRA without incurring penalty fees. However, if you close the account early, the 10 percent penalty will apply.

Capital Gains

Penalties also come in the form of short and long-term capital gains tax. How much depends on how long you hold the investment before closing the account and how much you profit. If you close an investment account within a one year time frame, you pay short-term capital gains tax according to your current income tax bracket. If you hold an investment for longer than one year before closing the account, you pay long-term capital gains at a tax rate of up to 15 percent. In addition, if you close an investment account early in the year, the IRS may require you to make estimated tax payments for the remainder of the year.

Long-Term Penalties

Penalties for closing investment accounts can extend to include more than money. Although sometimes easy to overlook, closing investment accounts can derail the realization of long-term financial goals. Investments always come with risk, and investments need time to grow. Closing an investment account can be costly in the short-term, eliminates any potential profit the investment may have realized over time and sets back the attainment of long-term financial goals.

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About the Author

Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.

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