You’re allowed to terminate your Roth individual retirement account any time you want; all you have to do is ask for your money back. It might cost you, however, because if you’re in yours 20s or 30s, you’re most likely not eligible to take a qualified distribution. Uncle Sam and the Internal Revenue Service aren’t fans of raiding your retirement nest egg early.
The IRS, as of 2013, requires you to jump through two hoops before you’re eligible for qualified distributions from your Roth IRA. First, your account must have celebrated its fifth birthday, using Jan. 1 of the first tax year you made a contribution as its date of birth. Second, you must be either 59 1/2, permanently disabled or taking up to $10,000 to buy your first home. Failing to meet these requirements means that terminating your IRA counts as an early withdrawal.
If you’re terminating your Roth IRA before you can take qualified distributions, you do get your contributions back without being taxed. After all, you paid taxes when you put the money in, so you won't have to pay taxes on the same money a second time. Your earnings will count as taxable income, however, because that portion of your Roth account wasn't included in your original investment. If you terminate your account, this earnings portion not only gets taxed, it is slapped with a 10 percent additional tax.
In some cases, Uncle Sam has mercy on you for withdrawing your earnings early and waives the 10 percent additional tax, but you must meet the specific criteria. There’s no getting off easy just for having a hard time making ends meet. Besides the permanent disability and first home purchase exceptions, you’re also allowed to avoid the penalty if you’re paying higher education expenses, medical costs in excess of 7.5 percent of your adjusted gross income or medical insurance premiums after losing your job.
Inherited Roth IRAs
If you’re thinking about terminating a Roth IRA you inherited, you can do so at any time. If the person you inherited the account from held it for at least five years, the entire amount is tax-free. If the original owner died before the five years passed, only the contributions the decedent made to the account come out without being taxed; the earnings count as taxable income. On the bright side, unlike your own Roth IRA you won’t have to pay any early withdrawal penalties on those earnings, regardless of your age.
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- The Rules for Transferring Money Out of a Roth IRA
- When Can You Withdraw Contributions in a Conversion of a Traditional IRA from a Roth IRA?
- Regulations Governing 401K Plan Withdrawals
- Are Distributions From a Roth IRA Taxable?
- Tax Differences in a Roth 401(k) Vs. a Roth IRA
- Non-Qualified IRA Withdrawal Penalties
- What Are the Benefits of a Roth IRA Vs. a Traditional IRA?
- How Long Do You Have to Hold a Roth IRA?