How to Terminate a Mutual Fund IRA
Terminating your mutual fund individual retirement account can be a simple and inexpensive process, or it could leave you with thousands of dollars of tax liability. The real question is what you want to do when you terminate your investment. Getting out of a particular mutual fund, or transferring your money away from one mutual fund family's account to another company can be accomplished through a sale or rollover. It's important to think ahead and be aware that terminating an IRA and getting your money out of the tax-advantaged account can trigger significant tax liability. At the same time, when you terminate your mutual fund IRA, it's also wise to consider how the change aligns with your overall investment strategy.
If all that you want to do is to stop owning a particular mutual fund in your IRA, all you need to do is sell your shares. As long as you're in a liquid fund that you can sell, you can usually call your broker or initiate a sale through the website. The sale may not clear until the end of the day, but you'll be out of your mutual fund shares. You can then reinvest that money in your account in a different fund or offering from that company, if you want. When you do this, you may have to pay additional transaction fees or brokerage fees as a part of terminating your mutual fund investment. These fees will eat into your account's balance and potentially reduce your overall return.
Once you've sold your mutual fund shares, you can also pull your money out of that IRA account and transfer it to a different company. For instance, if your IRA is with a custodian that limits your choices, you may choose to transfer the money to an account with a traditional or discount broker that lets you buy just about any stock, bond or fund that you want. With a transfer, the money goes right from the first IRA to the second without you touching it and without any withholding. If your IRA sends you a check, you'll be subject to withholding and it'll be your responsibility to put all of the money in the new account in 60 days or less. The best way to structure a transfer, instead of a rollover, is to sell your shares in your old account, but leave the money there. Then, you can ask the provider of your new IRA how to do a trustee-to-trustee transfer once you open your account -- they'll tell you exactly what to do for your particular account.
If you just want your money out of your IRA, you can take a distribution. If you aren't 59 1/2 yet, though, you'll have to pay taxes and penalties. The IRS will require you to pay your regular income tax on the entire balance that you withdraw, and you'll also have to pay an additional 10 percent penalty. For example, if you take out $50,000 and you pay taxes in the 33 percent bracket, you'll pay $16,500 in tax and $5,000 in penalties for a total tax of $21,500.
You may be able to pull money out of your IRA without having to pay a penalty, though. If you're 59 1/2 years old or older, you've reached the age threshold to take IRA withdrawals without paying penalties. You will have to pay income tax, though. In addition, if you're pulling money out of your IRA for an IRS-approved reason, you can also avoid paying penalties. Some of the reasons the penalty can be waived include withdrawing up to $10,000 of the cost of a new house if you're a first-time home buyer, paying medical expenses that would be tax deductible, paying unpaid taxes, paying medical insurance premiums while you're unemployed, and educational expenses.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.