Closing your IRA is typically an easy process, but the tax and fee implications are much more complicated. These vary based on your age, the company that holds your account and the reason that you're closing the account. Although you can't always avoid penalties, there are ways you can minimize them.
Moving money from one IRA account to another generally has no penalty. Do this when you want to combine accounts for ease of management, or you want the different investment opportunities that another company offers. The company that holds the IRA account you're closing must transfer the money directly to the new IRA company, either electronically or by check, or you'll have to pay taxes and penalties on the amount. If you are changing from a traditional IRA to a Roth IRA, you'll have to pay taxes on the amount in the account.
Penalties and Taxes
If you're younger than 59 1/2, you'll incur a 10 percent penalty when closing your account, unless you are withdrawing the money for an approved reason - otherwise, there is no penalty. Whether you'll owe taxes depends on the type of IRA that you have. If it's traditional, you'll pay taxes on the amount that you withdraw. If it's a Roth, you'll have to pay taxes only on the capital gains you've earned in the account.
You're allowed to close your IRA penalty-free for several reasons -- qualified educational expenses, a down payment on a first home, medical insurance, medical expenses not covered by insurance and greater than 7.5 percent of your income, or becoming disabled. You can also make regular withdrawals from the account penalty-free, but that does not apply when you are fully closing the account. Even if the money from your closed IRA does not have penalties, though, you may still be required to pay taxes.
Each company has it's own procedures for closing an IRA account. For example, some might require you to close it in person or in writing, while others will allow you to do it over the phone. Contact the company that holds your IRA if you are not sure of their rules for account closure.
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