Are IRAs Liquid Assets?
When you establish an individual retirement arrangement you choose what kind of instrument to invest your contributions in. You can invest your IRA money in accounts with a high degree of liquidity. However, due to restrictions imposed on IRA withdrawals by the Internal Revenue Service, IRAs are not regarded as liquid investments even if the underlying accounts have few withdrawal restrictions.
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Age
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The IRS tax code states that people with earned income can invest funds in an IRA and those funds grow on a tax-deferred basis. To prevent people from using IRAs as a device to avoid taxes in the short term, the IRS requires investors to keep funds in the account until they reach age 59 1/2. In certain circumstances, such as if you become permanently disabled, you can withdraw funds early without penalty, but generally if you access your IRA funds prior to reaching age 59 1/2 you must pay a 10 percent tax penalty and ordinary income tax.
Annuities
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You can convert your IRA account into a lifetime income stream if you establish an annuity. However, if you do invest your retirement money in an annuity you have to contend with withdrawal restrictions imposed by the insurance company that writes the annuity contract as well as IRS withdrawal limits. Deferred annuities begin with an accumulation phase, which can last for 10 years or more. On many types of deferred annuities you must pay a penalty of 8 percent or more if you access your funds during the accumulation phase.
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Certificates Of Deposit
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When you invest your funds in a certificate of deposit IRA you are entitled to a right of rescission. This means you can withdraw the funds without incurring a principal penalty within seven days of funding the account. If you withdraw from a CD IRA after the first week, you may have to pay a penalty that can deplete your principal. However, banks often waive penalty fees for withdrawals from IRA CDs, although you cannot avoid IRS tax penalties.
Considerations
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When you are over the age of 59 1/2 you can enjoy full liquidity on your IRAs. If you hold mutual funds, stocks or bonds in your account, you can liquidate these holdings at any time and enjoy immediate access to your funds. Once you reach age 70 1/2 you must begin taking required minimum distributions from your IRA otherwise you incur tax penalties. Consequently, many retirees ensure all their retirement funds contain highly liquid instruments.
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