Definition of Withdrawal Penalty

A price/penalty paid by an investment holder (of fixed-term) at time of withdrawing cash before the maturity date or agreed upon time. For instance, a tax-deferred retirement plan before 59 and a half years of age.

Explanation of Withdrawal Penalty

Usually, individual deposits money into Individual Retirement Arrangements (IRA) and then he/she must wait for 59-1/2 years to withdraw the accumulated funds. Until a person reaches the retirement age, IRAs shall not be used. Individuals withdrawing the money before the retirement age shall be penalized.  10% on the amount withdrawn is a penalty that a person has to pay.  

Why it Matters

An individual, when deposits cash into a bank account or any other similar institution then, that institution uses his cash for investment purpose. For example, a bank often invests the money for lending to customers etc. Therefore, institutions penalize the individuals who withdraw money before the agreed upon date. In short withdrawal penalty is to encourage individuals to stick to their agreements.