A tax-advantaged individual retirement account is a great place to set aside a portion of your retirement savings. Unlike some types of retirement plans, all of the money in your IRA always belongs to you and you can withdraw it at any time, for any reason, although you might have to pay a penalty. There are ways to close an IRA account without incurring an early withdrawal penalty.
Whether you can close your IRA account early and avoid penalties depends on your age or whether you meet certain exceptions.
Once you've met the minimum qualifying requirements, you can close your IRA account at any time without incurring an early withdrawal penalty of 10 percent. The requirements are slightly different depending on whether you have a traditional IRA or a Roth IRA. Qualifying requirements for a traditional IRA are strictly age-related. You can withdraw funds from your traditional IRA without the 10 percent early withdrawal penalty and close your account once you reach age 59 1/2.
Qualifying requirements for a Roth IRA are time-related. You can take penalty-free withdrawals from your Roth IRA once you have had the Roth account for at least five years, provided you meet at least one of the IRS' additional requirements. They include being 59 1/2 years old, being disabled or using the funds to purchase a first home. In the event of your death, your beneficiaries can access the funds in either type of IRA without a penalty.
Exceptions to the Rule
As with most rules, there are exceptions to the IRS' qualified withdrawal rules. You can withdraw your funds from your traditional IRA and close your account without incurring a penalty even if you are under age 59 1/2 if you use the funds to pay for unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. You can also avoid the penalty if you close out your traditional IRA early because you have become disabled or to pay for qualified higher education expenses for yourself, your spouse or your dependents. You avoid the penalty from closing your Roth IRA early if you use the funds to pay for significant unreimbursed medical expenses or to pay for medical insurance if you lost your job.
Transferring Your Funds
You can move the funds from your existing IRA into another qualified plan, such as a 401(k) or a different IRA, then close your old IRA without incurring an early withdrawal penalty. The best way to move your funds is through a direct trustee-to-trustee transfer. Your investments are moved electronically from your old trustee to your new trustee, so you never take possession of the funds. You incur neither a tax liability nor a tax penalty. You can also do a 60-day rollover by withdrawing funds from your IRA and depositing those funds into another IRA within 60 days. Once you have completed your rollover, you can close your old IRA account.
All funds you withdraw from your traditional IRA will be taxed as ordinary income in the year you received them, regardless of whether you are charged an early withdrawal penalty or not. Any penalty that is assessed is in addition to your regular income tax obligation. If you have a qualified reason for withdrawing money from your IRA, for example for educational expenses, but you withdraw more than the amount of those expenses, you must roll the excess amount over into another qualified plan to avoid paying a penalty. You can withdraw the amount that you contributed to your Roth IRA at any time, for any reason, without creating a taxable event, since you have already paid taxes on those funds.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.