Here's what to do when you need your cash.
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If you want to invest in stocks that will grow over time to help you reach your financial goals, then you really need to have a brokerage account. A good brokerage account will provide many of the essential services you need in order to invest well, including not only just the ability to buy and sell stocks but also tools like research to help you evaluate potential investments.
No matter what you're investing for -- whether it's to save for a new car or home or a truly long-term goal like retirement -- the time eventually comes when you need to withdraw your money from your brokerage account. But unlike with a bank account, taking money out of a brokerage account can sometimes involve some extra steps. As long as you're aware of the requirements that your particular broker imposes on the type of account you have, then you should be able to get access to your money when you need it.
Why withdrawing money from a brokerage account can be complicated
Taking money out of a bank account is easy. Your bank holds your money on your behalf, and you always have a fixed balance available when you need it. When you make a withdrawal, your bank just reduces your balance by the amount of cash you take. It couldn't be simpler.
Brokerage accounts are different because typically, most of your account will consist of stocks and other investments. The only time that taking money out of a brokerage account is as simple as it is with a bank account is if you keep a significant amount of uninvested cash in a regular brokerage account. In that case, most brokers give you the option of having a physical check sent to you, having money sent to a bank account via electronic funds transfer, or arranging for a wire transfer. Most brokers charge fees for wire transfers, which are faster than standard electronic funds transfers. Apart from that, though, you shouldn't need to pay a fee to access your money if you have a good broker.
Withdrawing money when you need to sell stocks to come up with the cash
One common reason why you might not be able to withdraw as much money as you want from your brokerage account is that you have to sell the stocks or other investments that you own in order to come up with the right amount of cash. In that case, you'll need to follow a three-step process:
1. Choose the stocks you want to sell and enter the appropriate trades with your broker.
2. Wait until the trades settle, which typically takes two business days.
3. Request the cash withdrawal once the proceeds of the sale hit your account.
The hardest thing for many investors to understand about this process is the second step. When you buy or sell a stock with a broker, the trade often seems to happen instantaneously, and you can typically see the new positions reflected immediately when you check your brokerage account online. But behind the scenes, your broker is working with other financial institutions to ensure that the following internal steps happen on a set schedule. Current securities rules give brokers two business days to finish the settlement process, so that's when your money will be available for withdrawal.
One thing to note is that if you have a margin account, then your broker might let you take cash out before your trades settle. However, you might get charged margin interest for the period of time between when you make the withdrawal request and when the settled funds come into your brokerage account. Always check with your broker before doing an automated withdrawal to ensure that you won't get hit with interest charges or other fees by jumping the gun.
Withdrawing money from brokerage accounts for retirement
The discussion above assumed that you were looking to take withdrawals from a regular brokerage account. If the brokerage account that you're thinking about withdrawing from is actually a retirement account like an IRA, then there's a whole different set of things to keep in mind.
Withdrawals from retirement accounts have tax implications that withdrawals from regular brokerage accounts don't. In particular, if you have a traditional IRA or 401(k) account and you take money out of it, then you'll have to pay income tax on the full amount of your withdrawal. To calculate the tax due, the IRS adds your withdrawal amount to your taxable income. You'll then run it through the tax tables when you prepare your tax return and pay the resulting tax, which will depend on your particular income level and tax bracket.
If you're at least 59 1/2 years old, then that's usually the end of the discussion. But those who are younger than 59 1/2 often have to pay an additional amount in early withdrawal penalties. The penalty is 10% of the amount withdrawn, and it can be a huge hit if you're not careful about it. Fortunately, there are some exceptions to the penalty rules for withdrawals if you use the money for certain permitted purposes, such as buying a first home or paying for eligible college expenses.
Various brokerage companies handle this situation differently. Some require you to have potential tax withheld from the amount you withdraw from your retirement brokerage account, which in turn can force you to make a larger withdrawal in order to end up with the amount of cash you want. Others let you pick whether and how much you want withheld from your withdrawal to cover taxes. If you don't have enough money withheld to cover the tax, then it'll be up to you to make up the difference when you file your return -- along with any interest or penalties that can apply to under-withholding situations.
Also, keep in mind that once you take money out of a retirement account, you can't necessarily put it back in unless you qualify to make future retirement contributions. There's a limited ability to treat a short-term withdrawal as a qualified rollover if you replace the money within 60 days, but you can generally do that only once each year.
Think about the consequences
Taking withdrawals from a brokerage account isn't quite as simple as taking money out of your bank account. In most situations, the need to go through the exercise of selling off a stock or other investment to generate the cash you need can take additional time and effort. However, that's the price you have to pay in order to benefit from the long-term wealth-producing power that stocks have. By knowing the exact process that your broker uses for the specific brokerage account you have there, you'll be better prepared to handle any curveballs that can arise and still get the cash you need when you need it.