What Is the Penalty if You Close an Investment Account?

The penalties that come with closing an investment account can vary dramatically among institutions and account types. It's entirely possible that you may be able to close your investment account without any penalties at all, but it's more likely that you'll face a number of different charges, fees or penalties. Some may be charged by your financial services firm, while others may be related to your investments themselves.

TL;DR (Too Long; Didn't Read)

The exact penalties associated with closing an investment account are dependent upon the particular institution you use and the account type that your investments were held in.

Account Fees

When you sign up for an investment account, your financial services firm will provide you with a schedule of fees for various actions. Some firms will not charge you anything at all to close an investment account, while others may charge you $100 or more. If you transfer your account to another firm, the receiving firm may be willing to credit you with the amount of your account closure fee. If your investment account is an individual retirement account, you may be more likely to trigger a fee because your financial services firm will be required to provide paperwork to the Internal Revenue Service regarding your account closure.

Commissions and Service Fees

If you plan to withdraw your assets when you close your account, you'll usually face fees in the form of commissions or service fees. To withdraw the money from your account, you'll have to liquidate your assets. Your firm will typically charge you a commission on each trade you make. If you pay an annual fee, you may also be liable for a pro-rated penalty amount of your annual fee. In some cases, you may even owe a full year's worth of fees, depending on the contract you signed.

Tax Repercussions

If you have significant profits in your investment account, you may inadvertently trigger higher taxes when you close the account. In the event that your account is simply in cash when you close it, you can withdraw the funds without any tax penalty. Should you have to sell any assets to get the money out, you'll generate a taxable gain on any position you sell at a profit. If you held those assets for one year or less, any profits will be taxable at your ordinary income rate, as opposed to the lower capital gains rate reserved for trades held for longer than one year. It is also possible that closing your account results in the realization of significant profits, and if that happens you may face a substantial tax bill.

Opportunity Cost

Whenever you sell assets, you lose the ability to participate in any future profits. If you have to liquidate your positions to close your account, you'll miss out on any gains in those positions. While you can reinvest those assets in another account, you bear the risk that an investment you sold may go up in value during the time that the money is in cash.

the nest