As prudent as it is to make regular contributions to your traditional IRA, there may come a time when you need to cash out the account and close it. Pressing financial needs that do not align with any of the IRA penalty-free withdrawal circumstances -- buying a first home, funding a college education or paying high medical expenses, for example -- might leave you with no other option. Cashing out your traditional IRA before you reach age 59 1/2 can mean paying as much as 45 percent to the Internal Revenue Service. Exhaust all other options first.
Work through the first page of IRS Form 1040 to estimate your adjusted gross income. Be sure to include the amount of your IRA cash-out on Line 16. Cashing out the account will increase your AGI and may propel you into a higher tax bracket.
Look up your tax rate on the IRS tax rate table. Find the table at the IRS website or at a financial or tax-related site. Convert the tax rate to a decimal and multiply your estimated AGI by the result. This is your estimated income tax liability. If you are 59 1/2 or older, you can stop calculating.
Multiply the cash-out amount by 0.1 and add the result to the income tax estimate to find your total tax liability if you have not yet reached age 59 1/2. The IRA early withdrawal penalty is 10 percent.
Tell your IRA trustee you want to close the account. The bank may send you, or ask you to download, account closing forms.
Fill out the forms. On the forms, let the bank know how you want to receive the cash. Typically you may either have the IRA balance transferred to your personal checking or savings account or ask for a check to be delivered to you by mail.
Submit the forms to the bank. You might also have to submit an account closing fee.
Look for your electronic deposit within 10 business days or so. A request for a mailed check might take two to three weeks to process. The trustee must sell your investments to convert them to cash, so the transaction will not be completed overnight.
Look for Form 1099-R by mail at the start of tax season. It should arrive in late January or early February. Box 1 of the form cites your total IRA withdrawal. Box 2a shows the taxable amount. For a traditional IRA, the two figures are often the same.
Write the total distribution figure on Line 16a and the taxable amount on Line 16b when you file Form 1040.
- If you own a Roth IRA, you can withdraw your contributions at any time without tax consequences. Earnings distributions are different. If you are not yet 59 1/2 and have not owned a Roth for at least five years, you'll pay both income tax and the 10 percent penalty on the earnings. If you have owned a Roth for five years or more, you'll just pay the 10 percent penalty. After 59 1/2, you can cash out the entire account tax- and penalty-free.
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