2020 has delivered a shock to the personal balance sheets of many South Africans. For many people, it’s no longer “business as usual” with a full salary paid predictably on the 25thof the month.
While there is no doubt that this period has been incredibly disruptive, many have used some of the savings they have generated bynot driving or shopping to pay down debt and improve their financial security.
Many are not so lucky.
If you are in a situation where you cannot generate an income and there really is no other option, you might be eyeing your investments as a source of cash to help you fund your day to day expenses.
While having cash on hand may give you temporary emotional and psychological relief and security, it’s often difficult to understand the rules or impact of withdrawing from any investments you have. Many of these rules that limit withdrawals are based in regulations.
Whilst we wrote this article to help you understand the rules and impacts of withdrawing, we really must stress that this should be the very last option that you want to take.
Withdrawing early from your investments could make it more difficult to achieve your financial objectives.
Although it’s also relatively easy to withdraw from your tax-free saving account, there are some long-term consequences. Tax-Free Savings Accounts are actually about wealth creation, and they really only start working after 10 to 15 years because the compound growth means that you should generate significant wealth and they will save you a fortune in tax.
The problem is that you are only allowed to put in R500000 over your lifetime, or R36000 per year until you reach R500000. The moment you add money to a Tax-Free Savings Account you reduce the lifetime allowance – limiting your future wealth creation. Needs must prevail if you are in financial difficulty of course!
Endowments (such as our own Fixed OUTcome Endowment) are great, tax-efficient investment vehicles that require you to invest for at least 5 years.
They are really not suitable for early withdrawals, you could be penalized by some providers (not us) andby law you are only allowed to make one full or partial withdrawal in the first 5 years.
You may also consider tapping into your share portfolio or unit trusts as a source of easy short-term cash. Just know that if you are selling because you are worried about poor performance, then you could turn your paper losses into real ones.
The challenge that 2020 has presented is that markets – including the JSE – have proven to be incredibly volatile. You could have sold your share portfolio in March 2020 - as concerns around COVID-19 were growing – only to have missed out on 30 to 50% recovery in the next 2 months.
Apart from high transaction fees, regularly trying to sell shares or unit trusts might create tax implications depending on when you purchased the units or shares as well as the price you paid for them.
You may be eyeing your longer term investments including yourretirement annuity(RA) orpreservation fundsbut the main purpose behind these vehicles is to provide for you in retirement.
You cannot withdraw from a RA before the age of 55 unless you are permanently disabled, get divorced or formally emigrate.
It might even be tempting to resign to cash in your pension or provident fund but before you do this, there are two things to realise. You are going to be very heavily taxed if you withdraw from your pension if you are not retiring.
Secondly, if you plan to resign and then rejoin your old firm, some companies make you wait a minimum of 6 months before you can rejoin.
For those who can remember back to the 2007/ 2008 Global Financial Crisis (GFC), the world had a very similar feel to it. The world remembers images of US bankers walking out of places like Lehman Brothers as the banking sector collapsed – it felt like the end of the world.
Yet history has shown that the period from 2008 – 2018 was arguably the single biggest wealth generation period of all time. Businesses were “priced for failure” in 2008 but those who had access to cash knew that they would be able to buy high-quality assets when everybody else was selling.
OUTvest is an authorized financial services provider
FAQs
Withdrawals are subject to ordinary income taxes, which can be higher than preferential tax rates on long-term capital gains from the sale of assets in taxable accounts, and, if taken prior to age 59½, may be subject to a 10% federal tax penalty (barring certain exceptions).
What happens if I pull money out of my investment account? ›
You can withdraw funds from your investing account at any time without tax penalty. Any investment gains and dividends in your investing account may be subject to taxes.
What is the rule for withdrawal from investments? ›
What does the 4% rule do? It's intended to make sure you have a safe retirement withdrawal rate and don't outlive your savings in your final years. By pulling out only 4% of your total funds and allowing the rest of your investments to continue to grow, you can budget a safe withdrawal rate for 30 years or more.
How do you withdraw money from an investment? ›
Yes, you can pull money out of a brokerage account with a bank account transfer, a wire transfer, or by requesting a check. You can only withdraw cash, so if you want to withdraw more than your cash balance, you'll need to sell investments first.
How much of your investment can you withdraw? ›
One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
When should you pull out of an investment? ›
The investment is too risky – The investment is not stable, and if it becomes too erratic for your liking, you might want to consider pulling out of your investment so you can reinvest in a less risky product. You've reached your goals – Not all reasons for pulling out of an investment are negative.
Do you pay taxes on withdrawals from investment accounts? ›
Unlike an IRA or a 401(k), you can withdraw your money at any time, for any reason, with no tax or penalty from a brokerage account. How the returns from these accounts are taxed depends on how long you have held an asset when you choose to sell it.
Does cashing out investments count as income? ›
Short-term capital gains are profits from selling assets you own for a year or less. They're usually taxed at ordinary income tax rates (10%, 12%, 22%, 24%, 32%, 35%, or 37%). Long-term capital gains are profits from selling assets you own for more than a year.
How many people have $1,000,000 in savings? ›
But that shouldn't be the case. In fact, statistically, just 10% of Americans have saved $1 million or more for retirement. Don't feel like a failure if your nest egg isn't quite up to the seven-figure level.
How long does it take to withdraw from investments? ›
Money deposited into an Investment Pot can take up to 7 days to be fully invested in the fund. You'll receive your contract note once the investment has settled. Withdrawing from Investments Pots can take up to 7 working days, although it's usually completed in 4 to 7 days.
Utilizing a Broker or Distributor
If you are investing in mutual funds through a broker or distributor, the withdrawal process becomes relatively straightforward. All you need to do is reach out to your broker or distributor and share details such as your folio number, scheme name and investment amount for redemption.
What are the penalties for early withdrawal? ›
More In Retirement Plans
Generally, the amounts an individual withdraws from an IRA or retirement plan before reaching age 59½ are called "early" or "premature" distributions. Individuals must pay an additional 10% early withdrawal tax unless an exception applies.
Can you invest and withdraw without penalty? ›
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.
Can you take money out of an investment account at any time? ›
Many investors open a brokerage account to start saving for retirement. However, the flexibility of this type of account means you can withdraw at any time and use the funds for shorter-term goals, too, such as a new house, wedding, or big remodeling project.
Can I retire at 62 with $400,000 in 401k? ›
You can retire a little early on $400,000, but it won't be easy. If you have the option of working and saving for a few more years, it will give you a significantly more comfortable retirement.
Should I cash out my investments? ›
Cash doesn't grow in value; in fact, inflation erodes its purchasing power over time. Cashing out after the market tanks means that you bought high and are selling low—the world's worst investment strategy. Rather than cash out, consider rebalancing your holdings in downtimes.
Can I withdraw from investment fund? ›
You generally can withdraw money from a mutual fund at any time without penalty. 7 However, if the mutual fund is held in a tax-advantaged account like an IRA, you may face early withdrawal penalties, depending on the type of account and your age at the time.
Is it bad to pull money out of stocks? ›
After all, nobody likes losing money; that goes against the whole purpose of investing. However, pulling your money out of the stock market during down periods can often do more harm than good in the long term.
Should I pull out of my investments to pay off debt? ›
So, if you're wondering whether to pay off debt or save for the future first, the answer is always pay off your debt. Investing while you're in debt is a zero-sum game. Any money you might earn from your investments is pretty much canceled out by the interest you're forced to pay on your debt.
Can an investor pull out of an investment? ›
If you do pull out of an investment, you'll be selling your shares or redeeming your capital before its intended maturity date. Remember that investments are inherently volatile, meaning their value can fluctuate, sometimes significantly, over time.
