What Is the Penalty for Closing a Roth IRA Early?

A Roth IRA is a special type of individual retirement account that allows you to make contributions with after-tax dollars. This allows you to withdraw money from the account tax-free at retirement.

Time Frame

If you close your Roth IRA before you reach age 59 1/2 and you have had the account open for five tax years, you are considered to have withdrawn the money early.

Tax Years

The age of your Roth IRA is counted from Jan. 1 of the tax year you made your first contribution. For example, if you made your first Roth IRA contribution on June 3, 2009, the age of your Roth IRA would be counted from Jan. 1, 2009.

Contributions

You can withdraw your contributions from your Roth IRA early without any penalty.

Earnings

If you withdraw earnings early, you must pay a 10 percent penalty on the amount withdrawn and include the amount of the earnings as part of your taxable income. For example, if you had a Roth IRA worth $50,000, $35,000 from contributions and $15,000 in earnings, you would have to pay a 10 percent penalty on the $15,000 for a total of $1,500, and you would have to include the $15,000 in your income to be taxed at your normal income rate.

Function

You must report your early distribution on form 5329 and file your taxes using Form 1040 to report the penalty for closing your Roth IRA early.

References

• IRS: Roth IRA Rules
• Money Zine: Roth IRA Rules