What Happens When I Close an IRA?

You can close an individual retirement account at any time. But closing an IRA could lead to tax penalties and account close-out fees. With a traditional IRA, you have to pay income tax on withdrawals, while on a Roth IRA you can make tax-free withdrawals. However, you only have to contend with taxes if you actually take possession of the funds.

Rollover of an IRA

You do not have to pay any taxes if you close out an IRA and reinvest the money within ​60 days​ into a new IRA account. Federal law requires IRA custodians to withhold ​10 percent​ of the IRA disbursement unless you specifically ask not to have any funds withheld to cover taxes. If the custodian does withhold funds, you get the money back at the end of the tax year as long as you do complete the rollover. If you do not complete the rollover within ​60 days​, then you cannot reinvest the money in an IRA and you have to accept the account proceeds as taxable income.

Custodians of an IRA

You use the IRA designation to segregate your tax-deferred retirement savings from your taxable investments. But within an IRA you actually have to invest your money within some kind of an account. If you invest in an annuity or a certificate of deposit account, you incur a surrender penalty or redemption fee if you close your IRA before the account reaches maturity. You also pay a fee known as a back-end sales load when you sell certain kinds of mutual fund shares, while you pay trade fees to sell other types of securities.

Therefore, you may lose some of your IRA money to custodian fees regardless of whether you rollover the account or take possession of the money.

Withdrawal of Funds

If you decide not to move your IRA money to another tax-deferred account, you have to pay income tax on any funds that were not taxed prior to investment. You pay income tax on your money before you deposit it into a Roth so only your account earnings are taxable. However, you do not have to pay taxes on your earnings that have been in a Roth account for at least ​five years​ as long as you are aged ​59 1/2​ or older. You always have to pay income tax on traditional IRAs since you invest pre-tax money into the account.

Qualified IRA Withdrawals

When you close an IRA and accept the proceeds as taxable income, you also have to pay a ​10 percent​ penalty tax on any funds that have not previously been taxed unless you make a qualified withdrawal. IRA withdrawals made after you reach the age of ​59 1/2​ are qualified, as are any withdrawals you make after becoming disabled.

The Internal Revenue Service regards withdrawals made to cover certain medical costs and health insurance premiums as qualified, as well as withdrawals to cover higher education costs for you or an immediate family member. You can access ​$10,000​ penalty free to cover costs related to a first-time home purchase.

You can also access IRA funds without a penalty if you make systematic withdrawals from the account for ​five years​ or more that are designed to continue for the duration of your life.