Archives for April 2010

What if, for some reason, you really do need to make a withdrawal from your IRA before you are 59.5 years old? One example is withdrawing a Roth IRA contribution without penalty, which you can do at any time. Some folks were wondering how hard it would be to do so, so I just tried to withdraw $100 from my Roth IRA held at Vanguard. Would they put up a fight? Require forms signed by a notary public? Ask for a DNA sample?

It turns out, they simply subject you to a long series of confirmation screens. You can follow along yourself if you have an account too – just be sure not to click on that final “Submit” or you’ll actually do it!

First, I logged into Vanguard.com, went to my IRA account, and clicked on “Buy & Sell” to try and sell some one of my mutual fund holdings (VEIEX for the curious). They immediately throw up a warning:

Bravely, I clicked “Yes”. On the next page, I could choose the amount to sell and how I’d like the proceeds sent to me:

• Electronic bank transfer—Two business days if submitted before 4 p.m., Eastern time; three business days if submitted after 4 p.m.
• Wire— The redemption proceeds will leave Vanguard by the close of business on the next business day; two days if processed after 4 p.m. Eastern time.
• Check—Within 7 to 10 business days.

For some reason, the Wire option wasn’t available in the pulldown menu. Instead, I was given the option to exchange the money into a fund within my taxable account held at Vanguard. I went ahead and chose to send it directly to my linked bank account. This led me to the tax withholding page:

Tax withholding information
Moving money out of a retirement account is a distribution. Qualified Roth IRA distributions are not subject to federal income tax. All or a portion of nonqualified Roth IRA distributions may be subject to federal income tax.

You can either elect to have no federal income taxes withheld from your Vanguard Roth IRA distribution or request withholding at a rate between 10% and 100%. You will remain liable for payment of federal income tax on the taxable portion, if any, of your withdrawal. Tax penalties may also apply if your estimated income tax payments or income tax withholdings are insufficient under federal or state rules.

Since I am pretending to only withdraw a contribution, I chose not to withhold anything. Again, a warning screen appears:

Do you want to continue?
The transaction you have selected involves a premature distribution that is not due to death of the original IRA owner. This distribution will be coded and reported to the IRS as J—Early distribution from a Roth IRA.

Next up is a screen about whether you’d like a tax withholding notice sent to you via e-mail or snail mail.

Receive a tax withholding notice
Because you are completing a distribution from a retirement account, you may request a copy of the tax withholding notice. This notice is for informational purposes only.

Since my fund has a redemption fee, the next page reminds me that this fee will be taken out of the proceeds of the sale:

The Emerging Markets Stock Index Fund imposes a 0.25% redemption fee on the total amount of this redemption.

I acknowledge all this, which finally leads me at the last confirmation page.

Review & submit
Your Vanguard® fund redemption will be processed using the closing share price on the business day on which Vanguard receives your request. Requests received after the close of the New York Stock Exchange (usually 4 p.m., Eastern time) will be processed using the next business day’s closing price.

That’s it! I quickly click on Cancel, and no action was taken.

Summary

In less than 2 minutes, I was able to request an early withdrawal online from my Vanguard IRA. No humans, no forms to send in. Good to know. Taking 2-3 business days directly into my bank account seems fair enough. A wire transfer would be even faster, although there would likely be a fee involved.