The traditional IRA allows you to grow your pre-tax dollars in a tax-free environment until you are ready to withdraw. Usually, you'd keep the money in the IRA until retirement, but there may be cases where you want to withdraw the money and close the account. Whether or not you'll pay a penalty for this depends on certain factors.
If you're unhappy with the company that manages your IRA, you don't have to keep the account open. You can take the money and put it into a new IRA account elsewhere. If doing this, you must complete the transfer with 60 days, including weekends and holidays. Otherwise, you can incur a 10 percent penalty and must pay taxes on the money from the closed account.
The traditional IRA allows you to make penalty-free withdrawals once you reach age 59 1/2. Though most people do not take the full amount in the account at that age, you are free to do so and close the account without facing penalties. You will, however, be responsible for paying taxes on the full amount that was in the account.
When you use the money from closing the IRA for certain types of expenses, you do not incur the penalty charge, though you have to pay taxes. These penalty-free exemptions include paying for medical expenses that exceed 7.5 percent of your income, paying qualified educational expenses, paying an IRS levy for taxes or using up to $10,000 for purchasing a new home.
If you choose to close your account for any reason other than those listed above and you are younger than 59 1/2, you will incur a 10 percent early-withdrawal penalty fee. This penalty applies to the full amount that you've withdrawn, whether you close the account or not.
Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.