If you have an individual retirement account that you want to close, or dissolve, there are several steps you must follow. In most cases, closing an IRA will have tax consequences, though these can be avoided or minimized depending on how you handle the distribution of the funds. Carefully consider your situation and the various options you have before dissolving your old account.
1. Contact the trustee holding your IRA funds. Ask for the appropriate form to request the distribution of all of your funds from the account.
2. Complete the form to request all of your funds from the account. If you intend to take the cash, fill in your name as the recipient of the funds. If you want to roll over the funds into another qualified retirement plan, you will need to list the name and location of the plan as well as the account number and any other necessary information so that the money from the IRA can be moved directly into the new account.
3. Fill out the required tax forms related to the transaction. The funds are typically considered to be income for the year. IRA tax forms are handled along with your regular taxes and reported on Form 1040. You may also need to fill out Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,” and Form 8606, “Nondeductible IRAs.” These forms are included with your 1040 when you file your income taxes.
- Dissolving a retirement account reduces the funds you will have available to you upon retirement. If you have reasons for closing the account other than needing the cash, it is often best to roll over the account to another qualified savings plan. If you do so, have the money transferred directly from one plan to the other to avoid tax withholding.
- Closing an IRA has significant tax consequences unless you are qualified to receive the funds. In general, being qualified means ither you are disabled, have reached the age of 59-1/2 or are the beneficiary of the original IRA owner. There are some other qualifications that may also apply in certain circumstances. If you are not qualified, you will not only face a 20-percent tax withholding for all the money you receive from the IRA -- except a Roth IRA -- you will also have an extra 10-percent tax penalty withheld. Rolling the money over directly into another qualified retirement account avoids this consequence. You may still be responsible for all taxes owed on the money for the year you take it from your IRA, and in some cases the withholding will not be enough to cover what is due.
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