Individual retirement accounts are great savings vehicles. In addition to getting a tax deduction on most contributions, your earnings in an IRA grow tax-deferred. The party stops when it's time to take money out of your IRA. In addition to taxes on most distributions, you might be liable for fees, both to the government and to your financial services firm.
Your IRA account generates revenue for the firm where you keep it. In addition to charging you commissions on the products you buy, many firms also levy an annual fee of $60 or more. As one last chance to make money before you leave, some firms also charge a fee to close an account, often as high as $150. If you have your account with a discount or online broker, you can usually avoid IRA fees, including the termination fee.
Depending on the size of your account, the biggest cost involved with closing an IRA is usually your federal tax bill. With the exception of Roth IRAs, money taken out of an IRA is fully taxable. When you close your IRA, you'll have to report the amount you take out to the IRS when you file your taxes. If you're in the top tax bracket, as of 2012 you'd have to pay out 35 percent of your IRA just in federal income taxes. Since your tax bracket is based on the amount of your taxable income for the year, closing out a high-value IRA could push you up from a lower tax bracket to a higher one.
In most states, the tax bill on your IRA doesn't stop with your federal taxes. Nearly all states tax IRA distributions the same way the federal government does, as ordinary income. Only nine states -- Nevada, Washington, Florida, Texas, New Hampshire, South Dakota, Wyoming, Tennessee and Alaska -- have no state income tax. Others charge rates as high as 11 percent, in the case of Hawaii.
Early Distribution Penalty
Retirement accounts, such as IRAs, are meant to fund your retirement expenses. If you need to close your IRA before you retire, you'll owe additional penalties, on top of all the taxes you have to pay. With few exceptions, closing an IRA before you reach age 59 1/2 will cost you a 10 percent early distribution penalty. Coupled with state and federal income taxes, you could be looking at 50 percent or more of your IRA value lost to taxes and penalties. Exceptions to the 10 percent penalty include withdrawals for certain higher education expenses, medical costs and up to $10,000 to buy or build your first home.
- IRS: Publication 590 -- Early Distributions
- IRS: Publication 590 -- Are Distributions Taxable?
- Baird: Schedule of Fees and Service Charges
- IRS: Publication 590 -- Roth IRAs -- Are Distributions Taxable?
- Scottrade: Individual Retirement Accounts (IRA)
- Rutgers: 2012 Marginal Tax Rates
- IRS: States Without a State Income Tax
- Federation of Tax Administrators: State Individual Income Taxes
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