An individual retirement arrangement is a long-term way to save money for retirement with some tax advantages, such as tax-deferred growth of your money until withdrawal or tax-free withdrawals at retirement. If you close the account, the balance is treated for tax purposes as a withdrawal. Early withdrawals from IRA accounts may be subject to taxes and penalties.
If you withdraw Roth IRA contributions in the year that you made them, including any earnings on that money, it is as if you never made the contributions, and no taxes or penalties are due on the earnings. If you close a Roth IRA five years after opening it, or after age 59 1/2, the earnings are tax and penalty free as well. At any time before the five years, the earnings are subject to income tax at your normal rate, and you will be assessed a 10 percent tax penalty. You can withdraw Roth IRA contributions at any time tax-free.
Money in a traditional IRA is taxable when you withdraw it. This is true no matter your age at the time of withdrawal, or how long the account has been open. Traditional IRA distributions are taxable at your normal income tax rate. If you close a traditional IRA account before age 59 1/2, you will pay a 10 percent penalty on the balance. In addition, you will pay taxes at your normal income rate in the year you close the account.
Contributions to a non-deductible IRAs are not taxable at any time, the same way that Roth contributions are not taxable. The earnings on non-deductible contributions are treated the same way as traditional IRA earnings. They are taxable at the time you withdraw them. In addition, earnings on your investment are subject to the 10 percent penalty if you close the account before age 59 1/2.
You can withdraw up to $10,000 from an IRA without penalty for a first-time home purchase. If you have not had an ownership interest in your primary residence for at least two years, the IRS considers you a first-time home buyer. You can withdraw funds penalty free for education expenses at an approved post-secondary school, and to pay for certain healthcare expenses. Penalty-free withdrawals from an IRA are also allowed if you have a disability that prevents you from earning a living. In these cases, any applicable taxes are due on these withdrawals.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.