How to Dispose of an IRA Account

Consider carefully the tax ramifications before liquidating your IRA. While most IRA owners take periodic distributions instead of lump-sum payments from an IRA during retirement, some people may reconsider lump-sum distributions during economic downturns. Furthermore, beneficiaries may be required to fully liquidate an IRA after an account owner's death. Regardless of the scenario, disposing of a retirement account is fairly easy; knowing all of the tax implications, however, is not. Therefore, discuss tax and penalty ramifications with your tax adviser prior to liquidation.

Things You'll Need

• Publication 590

Instructions

1. Calculate your potential taxes and penalties before liquidating the IRA. Unless it's a small IRA for which the tax ramifications are relatively small, retrieve your Form 1040 from the previous tax year and your current IRA statement(s) to review with your tax adviser to ascertain your tax and penalty liabilities. You are responsible for all taxes and penalties assessed in the year of the distribution.

2. Sell assets currently invested in the stock market. It will take T+3--the day of the trade plus three-business days--for the trade to clear. IRA CD owners need to wait until the CD maturity date to liquidate the IRA without being penalized by the banking or financial institution for selling prematurely.

3. Check with your IRA administrator to find out if your IRA is subject to any administration or closing fees. Make sure to leave enough proceeds in your account to cover those expenses when the account is closed.

4. Download the IRA distribution form and fill it out accordingly, or complete the transaction over the phone with a representative. Be aware that some states require state tax withholding if you opt for federal tax withholding on your distribution. IRA custodians automatically withhold 10 percent for federal taxes if you don't provide withholding instructions, so don't leave the withholding section blank.

5. Keep watch for your distribution if it is mailed by check or bank-wired (if you had more than $500 distributed) to one of your personal accounts.

6. Refer to your 1099-R (provided by your IRA custodian) for reporting your taxable distributions on your 1040. E-filings only require the taxable distribution reported on the electronic 1040, but paper filings should have the 1099-R submitted with the paperwork. Form 8606 must be submitted to the IRS if you are withdrawing non-deductible contributions from a traditional IRA; otherwise, you will pay taxes on those contributions again.

7. Consult a tax adviser if you are inheriting an IRA. IRS Publication 590 goes over the inherited IRA statutory provisions, but if you are unfamiliar with the provisions and tax consequences, seek professional advice. In addition, the IRA custodian will require that paperwork be submitted before beneficiaries take any action on a deceased owner's account.

Tips & Warnings

• If you are inheriting a Roth IRA, be forewarned that your inheritance is not tax-free. If earnings and conversion holding periods are met, you will not be subject to additional income tax; however, you are still subject to estate taxes.

Resources

• What If You Inherit an IRA?
• Avoiding IRA Inheritance Disasters