28 Apr How to Take Money out of Your Investment Account?
Maybe you’ve been really diligent in putting funds into your investment account, but now you’re ready to take money out of your investment account. After all, you’re investing for a reason: to use the money someday for something important like retirement, college tuition, buying a house, or starting a business. So how exactly do you go about taking money out of your investment account, and what do you need to know about paying taxes on what you withdraw?
What Is an Investment Account?
First, let’s discuss what investment accounts are. They can include simple bank accounts; retirement accounts; brokerage accounts, like stocks, bonds, and mutual funds; as well as 529 accounts for college, just to name a few. As you can see, there are many different types of investment accounts and many different places that can hold your accounts. Investment accounts are anywhere you invest your money so that it can compound and grow at an accelerated rate for later use.
Taking Money out of Your Investment Account
The bottom line is this: it’s your money; do what you want with it. If you want to take money out of your investment account, then that’s your prerogative. You don’t need anyone’s permission. Of course, it would be wise to seek advice from a professional beforehand, especially if you’re unsure or new to the investment game. But if you’re confident, go ahead and make your move.
Now that we have that out of the way, understand that withdrawing funds from your investment account is similar to taking money out of your 401(k), but there are some differences too. For example, with investment accounts, you have to consider capital gains taxes and taxes on dividends and interest.
Finally, depending on where you have your investment, it could be easier or more difficult to withdraw funds. For example, taking your money out of a bank account is pretty simple: you walk in, give your account information, show your identification, sign the withdrawal slip, and you walk out with cash in hand.
However, it’s not so easy to take money out of your investment account through a brokerage firm. In fact, it can often take two to three days. The reason for this is you don’t just have money sitting in your investment account at the brokerage firm that you can withdraw. Your money is tied up in stocks, bonds, and other investments, so in order to get cash, you have to sell some of your stocks or bonds. Your broker can help you determine how many of which investments you’ll need to sell in order to obtain the amount of cash you want. Then you have to wait for a few days for the sale to fully settle before your cash is ready to withdraw.
Taxes on Investments
You must understand that the IRS sees taking money out of your investment account as income, and, as you know, Uncle Sam always gets his cut of your income. How much income tax you pay depends on what type of income it is and what type of account it is. Here are the types of taxes you may have to pay when you withdraw funds from your investment account or if you have dividends or interest:
> Capital Gains: When you sell an investment and make a profit, that’s capital gains. You’re required to pay taxes on any capital gains; how much you pay depends on how long you had the investment. Generally, you pay taxes at your regular income tax rate for short-term capital gains (you had the investment for less than 12 months) while you pay 0-20% taxes for long-term capital gains (you had the investment for more than 12 months).
> Taxes on Dividends: When you own stocks, mutual funds, or Exchange-traded Funds (ETFs) in companies, the companies will pay you income in the form of dividends. This income is reported to the IRS, and you’re responsible to pay taxes on this income, anywhere from 0-20%, depending on how long you’ve had the investment and which tax bracket you’re in.
> Taxes on Interest: Interest paid on savings accounts, CDs, bonds, or other long-term investments is taxable at your regular income tax rate.
> Taxes on 529 accounts: Withdrawing money out of your college 529 account won’t cost you anything in taxes as long as you use the money for qualified expenses.
> Taxes on IRAs: Depending on whether you have a Roth IRA, traditional IRA, or other retirement account, your taxes will vary. Because all of your contributions are pretaxed, you pay no taxes when you withdraw money out of your Roth IRA. However, with a traditional IRA, your withdrawals are taxable. And don’t forget that there are usually early withdrawal penalties on top of taxes if you’re under a certain age. It’s best to speak with a financial advisor to understand how taxes work with your particular retirement account.
> Taxes on Insurance Policies: Some people choose to cash out a portion of their life insurance policy (whole, universal, or variable universal). Expect to pay taxes on the amount of money the account has earned over and above what you’ve paid into it. This will be treated like regular income, at your normal income tax rate, upon withdrawal.
Concluding Thoughts
As you can see, depending on what types of investments you have, it may be easier or more challenging to take money out of your investment accounts. Sometimes it’s a quick process with minimal taxes being owed, and other times it takes several days and results in you paying taxes and/or fees when you withdraw. It’s best to understand how withdrawals work and what will be required of you before you even begin an investment. That way, there are no surprises.
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https://investor.vanguard.com/investing/taxes/investment-income
https://www.fool.com/the-ascent/buying-stocks/blog/how-to-withdraw-money-from-a-brokerage-account/
https://finance.zacks.com/tax-liability-taking-money-out-investment-1410.html
https://budgeting.thenest.com/tax-liability-taking-money-out-investment-23304.html
https://www.nerdwallet.com/community/t/ask-financial-advisor-pull-out-money-from-investments/14105
