According to the U.S. Census bureau, as of 2010, there were 7,581 mutual funds in existence, with 4,585 of these being equity mutual funds. The value of these funds is over $11.8 trillion. When you sell shares in a mutual fund and withdraw the money, you may end up paying a penalty, depending on if the fund is a retirement account or if it is set up with redemption fees.
Traditional IRA or 401(k)
If your mutual funds are held inside of a traditional IRA, you will pay a tax penalty in most cases if you withdraw the money before you reach age 59 1/2. The penalty is equal to 10 percent of the amount that you withdraw. In addition, you will need to pay income taxes on the amount that you withdraw at your normal income tax rates.
With a Roth IRA, your mutual funds may be subject to a penalty depending on the amount that you withdraw and the source of the funds. Roth IRA contributions can always be withdrawn tax- and penalty-free, and contributions are the first funds withdrawn. Roth funds that you have converted from a traditional IRA or 401(k) are subject to a 10 percent penalty if it has been less than five years since the conversion. Investment gains have a 10 percent penalty if you are under the age of 59 1/2 or if the account has not been open for at least five years and you are over age 59 1/2.
Penalty-Free IRA Withdrawals
You can withdraw from mutual funds held in your IRA account penalty free in certain cases. If you are purchasing a first-time home, you can withdraw up to $10,000, and your spouse can as well, to complete the purchase without penalties. You can also withdraw penalty-free from your IRA-held mutual funds to pay for tuition expenses for a family member's college tuition. In addition, the 10 percent penalty is waived if you die and your heir begins to take IRA withdrawals.
Although penalties for withdrawing from mutual funds are often associated with retirement accounts, some non-retirement investments can have penalties for withdrawing money as well. Some mutual funds charge a redemption fee, which is a percentage of the amount that you withdraw by selling shares. A deferred sales charge is a back-end load on a mutual fund, assessed the same way as a redemption fee. These fees are either retained by the fund or paid to a commissioned broker who sold the fund originally.