Early withdrawal penalty Definition Bankrate.com Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content

Early withdrawal penalty

It pays to understand early withdrawal penalties. Bankrate explains all.

What is an early withdrawal penalty

An early withdrawal penalty is assessed when a depositor withdraws funds from or closes out a before its date. Early withdrawal penalties exist to discourage investors from removing funds early from deposit accounts.

Deeper definition

When investors put money into investment accounts, deposit accounts or different funds, the institutions holding the funds reinvest them elsewhere to make a profit. Investors who demand their money back early potentially jeopardize the bank’s ability to fulfill other loan obligations. The early withdrawal penalty is a tool to help firms retain the funds they rely on. Early withdrawal penalties are usually charged against accounts that rely on some designation of fixed maturity, like the expiration of a certain time period. ), 401(k)s and are the most common investments that carry early withdrawal penalties. Occasionally, there are special circumstances in which early withdrawal penalties are waived or removed for investors who qualify. Withdrawing investment funds early to pay a high medical expense or make a qualifying home purchase is enough to get an early withdrawal penalty fee waived. But requirements can vary significantly from one financial institution to the next. Check out our to set a savings goal and plan for retirement.

Early withdrawal penalty example

John, 42, has $50,000 in a 401(k) account through his employer. John wants to take a European vacation and decides to withdraw $5,000 from the account. Because he is not 59 1/2 years old, the federal government charges him an early withdrawal penalty of 10 percent. So, John is penalized $500. In addition, he will have to pay taxes on the $5,000 when he files his taxes for that year.

More From Bankrate

Knowing bank holiday schedules can help you avoid delays on necessary transactions. A bank reconciliation statement helps you track business finances and catch errors. Looking for a nearby Chase Bank location or ATM? Here’s how to find the closest ones. Walmart MoneyCenter offers services like a checking account and money transfers. Walk away with stacks of cash just for opening a checking or savings account. Review ratings methodology For consumers looking to find the best bank or credit union for their individual banking needs, the choices are numerous and can seem overwhelming. Finding the right mix of high [...] Steer clear of these common bank fees to keep your accounts from taking a hit. These are the cities where ATM fees will put the biggest dent in your wallet. A notary public witnesses and validates the signing of important documents.