Can You Close a Roth IRA?
You can close an Roth Individual Retirement Account; but depending on when you do it, you might incur a significant tax penalty, plus income taxes, on a portion of the withdrawal. If you aren't happy with your Roth IRA, you can always make a tax- and penalty-free transfer to a new Roth IRA trustee instead of withdrawing the balance of your account.
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Roth IRA Trustees
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A Roth IRA is a type of tax-advantaged retirement account. IRAs were created by an act of the federal government, with rules laid out and enforced by the Internal Revenue Service. By law, you need a trustee to open an IRA. A trustee can be any bank, credit union, brokerage firm or tax professional who is certified by the IRS to administer IRA accounts. However, once you establish a Roth IRA, your account is not tied to any particular institution. You can transfer it as often as you like between certified trustees.
Trustee-to-Trustee Transfer
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If you want to continue saving and investing for retirement but are unhappy with your Roth IRA's performance, you transfer your account without tax or penalty by making a trustee-to-trustee transfer. To start the process, open a new Roth IRA with a bank or firm that offers the types of financial products you want to invest in. Then, fill out paperwork with your old trustee, directing it to transfer your assets to the new account. When the transfer is complete, you can close your old account.
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Rollovers
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If you want to personally deliver your assets to your new trustee, you can make a rollover. In a rollover, your old trustee releases your cash or securities certificates to you, which you must then redeposit in another Roth IRA within 60 days. To complicate matters, your old trustee must, by federal law, withhold 20 percent of the wealth in your account. You must redeposit 100 percent of the funds to avoid taxes and penalties. This means that you must come up with 20 percent of your Roth IRA's worth out of pocket. This is not a penalty, however, as you get the money back at tax time.
Withdrawing the Balance
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Perhaps you have no problems with your Roth IRA's performance but need cash. You always have access to funds in your IRA. However, you might end up owing a 10 percent early withdrawal penalty and income taxes on a portion of the amount if you take a withdrawal before you turn 59 1/2. The IRS does not tax you on early withdrawals of contributions you made to your account. However, amounts you converted from a tax-deferred plan, like a traditional IRA or 401k might be subject to penalties if they have been in your account for less than five years. You are also penalized for withdrawing your account's earnings early.
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