Early withdrawal penalty

An early withdrawal penalty is a fee which is imposed when funds are withdrawn from an investment before the date of maturity. For instance, if an individual sets up a ten-year time deposit account but decides to withdraw some of the money on the eighth year, then the entire agreement will be forfeited and a certain percentage will be deducted from the account. The imposition of the penalty serves as compensation for the financial institution, since the depositor or investor already promised to let it use a certain amount for a set period of time, but did not keep this commitment. Such penalties serve to discourage depositors from making withdrawals before the due date. However, concerns on how much money stands to be lost may be set aside in case of urgent need, or if more profitable options are made available to the investor.

In the United States, a penalty is also imposed on those who remove funds from their 401(k) ahead of the set date. A 401(k) is a savings plan which serves as retirement benefit. It enables workers to save money for their retirement. The fund is not subject to income tax until it is withdrawn. Employers are in charge of maintaining the 401(k) plans of their employees, who choose to have part of their income set aside for this purpose. Employers may also choose to add to employee contributions as an additional benefit.

Should an employee decide to withdraw money from this account before reaching retirement age, he may have to pay about 10 percent withdrawal penalty, in addition to income tax. This may be avoided if the individual chooses to retire early, though, but even this mode of action should be carefully thought out. However, it is still good to keep this as an option in case of pressing need.

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