What Happens when You Close a Roth IRA Account?

A Roth IRA account can be a great savings tool to invest for retirement. All money contributed is post tax, so every dollar in your account at retirement age is a dollar that you will have to spend, since no taxes will be deducted. There are some situations that would necessitate closing your account, and you have to be prepared for the consequences. The IRS does penalize you for closing or withdrawing early from your retirement savings, so understand the benefits and drawbacks of doing this.

Early Withdrawals

If you withdraw early from a retirement account, you will pay a ten percent penalty. A Roth requires that you are fifty-nine and a half years old to make withdrawals penalty free. You will not pay taxes since they were paid before depositing money in to the Roth. There are a few reasons that will allow you to withdraw before the age of fifty-nine penalty free.

Exceptions to the Early Withdrawal Penalty

There are several exceptions to the early withdrawal penalty. If you need to close your account, or take withdrawals and you do not meet on of these rules, you will pay the ten percent penalty. If you do meet the criteria, you can take the money and owe nothing, since taxes are already paid on the money. If you become disabled and cannot return to work, you can make early withdrawals. Also, if you are buying your first home, or paying for yourself or a dependent to attend college, you make penalty free withdrawals. If you have medical bills, you could possible withdraw from your Roth to pay them. And, if the IRS puts a lien on your Roth account, and they take money from it because of back taxes that you owe, you will not pay a penalty on that money.

Closing Account

If you want to close your Roth account because you are unhappy with the results, don't like your brokerage or any other reason, you will need to move the money to another retirement account, or pay the penalty. The money can be moved to another qualifying retirement plan of your choice, but it must be rolled within sixty days of terminating the other account.

Closing Account due to Death of Owner

If the owner of the account dies, the funds become the property of the owner's beneficiary. The beneficiary can transfer the Roth to another retirement account. The beneficiary can also take withdrawals which will be penalty free. In some circumstances, the IRS will tax on the earnings that accrued in the account. This can be done for hardship withdrawals. Withdrawing for a first time home buyer or for education is always tax free. Withdrawals  because of death, disability, or medical expenses may be taxed on the earnings only, not the principal.

 

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