What Will You Pay When Closing an IRA?
When you close an Individual Retirement Account you may have to pay taxes and penalties depending on your age, the type of IRA and whether you intend to move the funds to a new IRA. Before you close the account, your IRA custodian must tell you of any fees, but you must wait to file your year-end taxes before you can determine the exact taxes involved.
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Certficiate of Deposit IRA
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If you close a certificate of deposit IRA within seven days of opening it you can lose up to six days of interest, but your bank cannot assess any principal penalties. Each bank determines its own CD IRA penalties. If you wait until your CD matures, you have a seven to 10 day grace period in which you can access funds without penalty. If you withdraw funds mid-term, many banks charge a penalty equal to six months of interest. However, some banks waive this fee for IRA withdrawals.
Investments
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If you own B or C class mutual fund shares inside your IRA, you must pay a commission known as a back-end load when you sell the shares during an account liquidation. Fees on B shares often amount to 4 or 5 percent of the share value, whereas the back-end load on C-shares normally amounts to 1 percent of the share price.
If you close a deferred annuity holding IRA funds, you may have to pay a penalty fee in excess of 10 percent. If you have already reached the end of the accumulation phase, during which your funds are invested, you do not have to pay a penalty to access your funds.
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Rollovers
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If you close an IRA and transfer the funds to another IRA, you do not pay any fees or taxes if you instruct the current IRA custodian to send funds directly to the new custodian. If you take possession of the funds and make the deposit into the new IRA yourself, then the current custodian must withhold 20 percent of the IRA proceeds to cover withholding tax. You receive this money back when you file your year-end taxes.
Taxes
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When you close a traditional IRA, you must pay income tax on the entire amount withdrawn. If you close the account before age 59 1/2, you must also pay a 10 percent tax penalty. If you close a Roth IRA, you pay no taxes if you held the account at least five years and are over 59 1/2. If you access funds before that age or within five years, you pay a 10 percent penalty and ordinary income tax on any account earnings.
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