How To Close a Roth IRA Account Early and Avoid the Penalty?

As you get older, meaning your productivity decreases. To enjoy a prosperous and comfortable old age, it is vital to prepare a retirement fund at an early age. Many choose Roth IRA because it is tax-free while saving and withdrawing funds. But, how to close a Roth IRA account early without getting penalized?

Sometimes, you change your mind about choosing retirement savings so you want to withdraw it immediately before the agreed timeframe. If it’s like this, can the pension fund be withdrawn early without causing big losses and avoiding penalties? To answer your concern, please read this article so you can get all the insights.

Roth IRAs at a Glance

If you are not familiar with Roth IRA, then it is important to know what it means first. Roth IRA stands for Individual Retirement Account which is a retirement savings account. This type of retirement savings offers an attractive offer because the funds you save can grow and are not taxed.

In fact, even when you withdraw pension funds, you will not be taxed as long as it is in accordance with applicable regulations. Requirements for withdrawing tax-free pension funds are at least five years after opening an account and entering the age of 59.5 years.

Tips on Closing a Roth IRA Early and Penalty-Free

Below are some tips to try for traditional Roth IRA account holders who want to close their accounts early. Applying the tips below allows you to avoid paying a 10% penalty for closing or withdrawing funds early. Let’s take a peek!

1. Health Insurance Premiums

Those of you who have health insurance premiums can still pay the monthly bills even though you are unemployed. You can withdraw the retirement funds in a Roth IRA to pay your insurance premium bills, your wife, or even other family members’. To withdraw these funds, make sure you meet the requirements below:

• 12 weeks in a row received unemployment compensation.
• Make sure you have taken the year of unemployment distribution. You can also choose the year of distribution for the following year.
• To avoid the 10% penalty, make sure you have received money from the retirement fund withdrawal for a maximum of 60 days after being rehired.

2. College Expenses

How to close a Roth IRA account early without being subject to the 10% tax is to withdraw for paying tuition fees. These tuition fees can be for you yourself, your children’s tuition fees, or even your spouse.

Withdrawing funds or closing accounts early with the excuse of paying for college will cover registration, tuition, and boarding. Furthermore, tuition fees also include money to purchase books, tools, and supplies.

To be able to use the money from closing your Roth IRA account early, you need to make sure to choose a school or university that meets the requirements. Hence, you can get the money you’ve saved without being deducted from fines.

3. Home Purchase or Renovation

Sometimes, you may face an emergency situation that requires you to immediately renovate or even buy a new home. If you don’t want to go into debt, then you might consider closing your Roth IRA account so you can get funds to buy or renovate a home.

Roth IRAs have a policy of not giving you a 10% penalty when you close or withdraw early if the maximum you withdraw is $10,000. Additionally, the $10,000 maximum withdrawal policy is specific to renovating, building, or buying a home.

4. Disability

Disaster can happen to anyone and at any time, even if you are very careful. If the accident causes you to become disabled, then you can also withdraw or close your Roth IRA at any time and be free of penalties.

However, a Roth IRA has its criteria for someone to be considered disabled, which includes being physically or mentally unable to carry out productive activities. To support this reason, you must also provide medical evidence when requesting early withdrawal or closing of your account.

5. Unreimbursed Medical Expenses

How to close a Roth IRA account early without penalties is for unreimbursed medical expenses. A Roth IRA will not give you a 10% penalty when you are forced to make an early withdrawal due to medical expenses.

The condition is that the medical expenses you bear are more than 7.5% of gross income. Usually, you must pay these medical costs in the same year you take the distribution.

6. Inherited IRAs

A penalty-free Roth IRA account withdrawal or closure policy applies to traditional inherited IRAs. Thus, the heirs do not need to wait until they are 59.5 years old to close the account or withdraw the pension. The beneficiary must empty the IRA account up to 10 years after the owner’s death.

This provision applies to non-spousal heirs such as friends, children, or other relatives. If a husband and wife have an IRA account and one of them dies, the funds can be transferred to the surviving spouse’s account. 

However, you need to know that the decision to transfer these funds will incur a penalty if you are not yet 59.5 years old.

Essential Considerations Before Closing a Roth IRA Early

While you can close or withdraw your Roth IRA early without penalty, be sure to consider the following important points:

1. Read the Rules

Every pension fund provider must have their own policies and regulations. Read carefully all the rules provided so you don’t lose if at any time you change your mind to close your account.

2. You Might Owe Taxes

While you can withdraw or even close your IRA account free of the 10% penalty, you are not necessarily tax-free. Usually, you will have federal income tax owed on the money you save and you are required to pay taxes to the state.

Does How to Close a Roth IRA Account Early Post Help?

To sum up, a Roth IRA is a special savings account to prepare retirement funds that can be withdrawn when you are at least 59.5 years old. However, if you find that you need funds urgently or change your mind, then you can try the tips on how to close a Roth Ira account early penalty-free in the article above.

Furthermore, the tips must benefit your family members so that your proposal is permitted. Remember to read the terms and conditions carefully to avoid losses in the future.