Since an individual retirement account (IRA) is intended for future expenses, the funds must stay in the account until the owner reaches the age of 59 1/2 for the owner to avoid monetary penalties. If the owner of an IRA wants to close the account in the first year that it’s open, the owner may do so, but the penalties apply.
If you want to open an IRA for retirement or other future expenses, you can do so through a couple of different venues. Employers generally offer a traditional, qualified IRA plan, which allows the IRA owner to contribute money to the IRA directly from employment income before that income is taxed. Financial institutions also offer non-qualified IRA plans, known as Roth IRAs, to which you must make contributions with earnings that have been taxed.
Closing an IRA
In order to close an IRA account within the first year, you must withdraw all funds that you have contributed to the account in that time. If the funds have made any interest, which they likely have, you must withdraw all of the interest made on those contributions as well. This remains true for either a traditional or a Roth IRA. Once the funds have been withdrawn from the account, the IRA may be closed.
When you withdraw funds from an IRA to close the account, you might not end up with the amount of money that you expect, especially in the case of a traditional IRA. If you withdraw funds from a traditional IRA, you must declare all of the withdrawn funds as income on your tax return, both contributions and earnings, since that money hasn’t been taxed. If you withdraw funds from a Roth IRA, you must declare only the earnings as income.
The early withdrawal of funds from an IRA also comes with a 10-percent penalty. This penalty applies to the total amount of funds withdrawn from a traditional IRA, or to the amount of earnings withdrawn from a Roth IRA. Unless you have an immediate need for the money contributed to an IRA during the year, you should consider leaving the account open. If you don't want to add any more money to the IRA, simply stop making contributions to the account.
- statistic image by Marko Kovacevic from Fotolia.com