Individual retirement accounts help you to build a nest egg for your retirement years, so certain rules set up by the IRS encourage you to avoid early withdrawals from your IRA account. Age limits also penalize you if you withdraw from the account too early. However, you can take withdrawals and even close your IRA account without penalty under certain circumstances.
Closing at the Right Time
You can close your IRA account starting at age 59 ½ without a tax penalty. The funds and contributions in your IRA remain tax-deferred as long as they stay in the account; you pay taxes as you withdraw the cash. The idea is that you will be in a lower tax bracket by the time you retire and your money has grown over time to help with your retirement needs. If you withdraw the money and close the account before then, you'll have to pay a 10-percent penalty, and the financial institution will hold back 20 percent for federal income taxes.
You can avoid the early-withdrawal penalty by rolling over the IRA rather than closing it. This means transferring the funds to another qualified account. For example, if you start a new job with an awesome retirement plan, you could roll your existing IRA over into that plan. You can also roll over your account into a Roth IRA, but you'll have to pay taxes on the money in the year you roll it over. Unlike a traditional IRA, where your money is tax-deferred until you withdraw it, a Roth IRA has you pay taxes on today’s income, but not in the future when you retire.
If you inherit an IRA account from a deceased holder, you can close the account without a penalty. Holding the inherited IRA in an account in your name subjects you to the same IRA rules and regulations, but also gives you the benefits of tax deferral. Although you won't have to pay a penalty, you may be on the hook for income taxes, depending on how the IRA withdrawals are characterized.
You can make early withdrawals from your IRA account with certain limitations. For example, first-time home buyers are allowed to take out up to $10,000 on the purchase without a tax penalty. This can add up to $20,000 if each spouse withdraws from retirement accounts and each one is a first-time home buyer. You can use your IRA account to pay for education costs for you or your family without penalty provided the IRS approves the institutions. Penalty-free withdrawals could also pay for medical expenses, health insurance while unemployed and disabilities.
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