Withdrawal definition
/What is a Withdrawal in Banking?
A withdrawal occurs when funds are removed from an account. Withdrawals can be triggered for many types of accounts, including bank accounts and pension accounts. A withdrawal may not be allowed unless certain conditions are met, such as the passage of time. For example, funds cannot be withdrawn from a certificate of deposit until one year has passed, or a person cannot withdraw funds from a pension account until he reaches retirement age. If these requirements are not met but a withdrawal is still made, this can result in penalties, which offset the amount paid out, resulting in a smaller net payment.
From the perspective of the entity managing an account, a withdrawal can require that investment instruments be liquidated before cash can be paid to the owner of the account. This can present an investment planning issue for the institution, which cannot invest funds in longer-term investment instruments if there is an expectation that withdrawals will occur in the near future. This issue is the reason for withdrawal penalties, which are intended to prevent account holders from withdrawing funds until the associated investments have been liquidated.
In rare cases, an in-kind withdrawal is made, which means that the account holder accepts as payment the type of asset in which the account funds are currently invested.
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What is a Withdrawal in a Partnership?
A withdrawal can also refer to the draw down of an owner's account in a sole proprietorship or partnership. In this situation, the funds are intended for personal use. The withdrawal is not an expense for the business, but rather a reduction of equity. A withdrawal can negatively impact the liquidity of a business, since cash is being extracted from the firm.
Can a Corporation Have a Withdrawal?
A withdrawal transaction is not possible in a corporate structure; instead, the company either issues a dividend or buys back the shares of an investor. If a corporation does not have enough cash to issue a dividend, it could instead issue a dividend in kind; this usually means issuing some of its excess finished goods to investors. While rarely used, a dividend in kind is one way for investors to withdraw assets from a corporation.
Terms Similar to Withdrawal
A withdrawal of funds from a partnership or sole proprietorship is also known as a draw.