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How to Properly Withdraw from an ISA

An ISA provides an excellent method for saving or investing, with significant tax advantages.

It is important However to understand all the rules governing ISA withdrawals to ensure you don't sell yourself short by taking out cash or selling shares at the wrong time.

How Withdrawals Work

The ability to withdraw from an ISA is dependent on the specific type of savings vehicle you choose. If the account is tied to a particular term, withdrawing funds before the term is over may result in penalties.The money is not taxable; in fact, you don't even have to report the withdrawal or income on your income tax forms.

Withdrawals and Contributions

The main drawback to taking your money out of an ISA is that you may lose some of your tax shelter benefits. To make this point clear, consider this example:

Joe has deposited the maximum amount that can be put into an ISA for the current year. A few months later, Joe decides to withdraw £2,000 for a family vacation. When he receives his bonus at work six weeks later, he decides to put the £2,000 back into his ISA.

The problem with this scenario is that Joe has already contributed the full annual amount into his ISA, according to the limits set by the Financial Services Authority. The withdrawal he made does not affect the contribution amount, so he cannot put any more into his ISA during the current calendar year. The money that was withdrawn was tax-free, but it didn't enjoy as large of a return as it would if it had remained in the ISA to earn interest or dividends for the full year.

If Joe had contributed less into his ISA before making the withdrawal, he would have been able to return some money into his account when he liked.

With these rules in mind, you can plan your withdrawals when they will be the most beneficial for you.

It is very important to understand the withdrawal guidelines of ISAs before taking any money out of your account. Withdrawals from ISAs can be made at any time, but the money cannot be replaced at a later date if it exceeds the overall contribution for any given year. With this information in mind, you can plan your withdrawals accordingly so you can enjoy the liquidity of an ISA - without the worry over losing your tax shelter advantages.

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