You can save money for your golden years by investing in an Individual Retirement Account. The Internal Revenue Service refers to these accounts as Individual Retirement Arrangements because many people hold IRA funds in insurance contracts or mutual funds rather than actual accounts. If such products make you feel uneasy you can liquidate your holdings without having to withdraw your funds from your IRA. In many instances, you can hold cash in your existing IRA, but depending on the nature of your IRA you might have to roll the money to a new institution.
The Internal Revenue Service created the concept of IRAs so that you could separate your long-term, tax deferred retirement savings from your short-term taxable savings accounts. Under federal rules, you can keep stocks, bonds, annuities, mutual funds and a host of other instruments within an IRA holding account. If you keep only cash in your account, you might earn a little bit of interest, but you are unlikely to see your account grow much over the long run. However, in turbulent times some people prefer to hold onto what they have rather than risk it all in the pursuit of greater gains.
Banks and credit unions offer a variety of different cash accounts in which you can deposit your IRA funds. Certificates of deposit with terms ranging from months to years pay you a flat rate of interest. You typically pay an interest surrender penalty if you liquidate a CD early and move the money into a different IRA instrument. You can also deposit your money into an IRA savings account. Many financial institutions impose no surrender penalties on these low-yield, highly liquid accounts. From the financial institution's perspective, you can withdraw the funds at any time so you can change your IRA investment elections further down the line. However, you must contend with taxes and an IRS penalty if you move your IRA CD or savings funds into a non-IRA account.
If you set up an IRA brokerage account you can hold hold a variety of instruments within it, including cash. However, from a broker's point of view, cash actually means a money market mutual fund. When investors sell securities, brokers typically use the sale proceeds to buy shares in these funds. Money market funds hold so-called cash equivalents such as U.S. Treasury bills, commercial paper and some actual cash. In theory shares in these funds always remain steady at $1 per share. However, during severe recessions money market shares can break the buck and fall below the $1 per share mark. Therefore, if you want to convert your IRA to actual cash rather than a mixture of cash and short-term securities, you must transfer the money to a bank or credit union IRA that is federally insured.
Mutual fund investment houses often charge commissions, known as loads, that you pay either when you buy or sell shares. You may lose some of your holdings to these fees if you sell the shares in your account. Likewise, your broker may charge transaction fees to sell your stocks, bonds and other holdings. If you cash in an IRA annuity account the surrender fees often amount to 8 percent or more of the account holdings. Do your homework and find out the fees involved before you make the switch.
If you decide to move your liquidated funds to the relative safety of a bank IRA you can ask your broker to convert your holdings into the form of a check. You have precisely 60 days to redeposit that money into a new IRA account at your bank. If you miss the deadline you have to accept the money as taxable income and also pay a 10 percent tax penalty. You can avoid the 10 percent tax penalty in some circumstances, such as if you are 59 1/2 or older or if you become disabled. You cannot avoid paying income tax regardless of the circumstances surrounding the withdrawal. Alternatively, you can simplify the equation by having the funds sent directly to your bank. Also, if you rollover your IRA you must ask your bank about custodial fees. Many institutions charge these fees simply for holding your money. Fees vary among banks, so that issue is one of several to consider when you decide on a bank to hold your account.
- Jupiterimages/Photos.com/Getty Images