Penalty for Withdrawing From a Mutual Fund
You can sell shares in a mutual fund at any time and in many instances you pay no fees for selling your shares. However, there are several different types of mutual fund shares. Depending on the type of shares you buy, you may have to pay a contingent deferred sales charge when you sell shares. Additionally, if you own shares inside a retirement account, you may have to pay tax penalties when you sell these shares.
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Share Classes
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Mutual fund companies sell different types of shares even within a particular fund, but among the share classes most commonly bought and sold are A,B and C class shares. You pay an upfront sales commission when you buy A shares, but you pay nothing when you sell these shares. With B and C shares you pay no upfront charges, but pay a contingent deferred sales charge or back end load fee when you sell. On B shares your normally pay a charge equal to 5 percent of the share value if you sell your shares within one year of purchase. This fee decreases each year and after eight years of ownership you pay no back-end fee at all. On C shares you pay a fee of about 1 percent if you sell the shares within the first 12 months of ownership.
No Load
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Some mutual fund companies sell shares that are known as "no-load" shares. This means you pay no commission to buy or sell these shares. However, you may have to pay a redemption fee which covers the fund companies actual operating expenses and this fee often amounts to 2 percent of the sale amount. Other funds charge a flat transaction fee whenever you sell your shares.
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Retirement Funds
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Employer sponsored retirement plans such as 401ks usually contain mutual funds and many investors also buy mutual funds with their Individual Retirement Arrangement contributions. If you are under the age of 59 1/2, you have to pay a 10 percent federal tax penalty if you liquidate mutual funds held inside a 401k or IRA, unless you roll those funds into another tax-deferred retirement account. You have 60 days after you sell the shares to reinvest the money without paying the penalty tax.
Considerations
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Mutual funds, including no-load funds also charge annual operating fees known as 12-b1 fees that cover the fund company's expenses. These fees are typically higher on B,C, and no-load shares than on A shares. However, the upfront commissions for buying A shares often exceed 5 percent. Therefore, you should consider the overall cost of each type of mutual fund share and your expected investment time ine before deciding which shares best suit your needs.
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