About Penalties For Terminating An IRA Account

There are numerous benefits to opening an Individual Retirement Account which are important to understand. There are also limitations and possible penalties if an IRA is terminated early or handled incorrectly. Understanding both the positives and negatives for IRAs will be helpful in determining if they are a good fit for your retirement planning.

Individual Retirement Accounts are managed by any number of various financial institutions and as such those institutions may impose account management fees or early termination penalties which should be understood before opening an account. If an IRA is terminated early the service provider may impose a maximum fee of $50.00. This fee can often be avoided if the account is already empty resulting from a rollover for full withdrawal.

Institutions, also known as IRA custodians, cannot impose a penalty is an IRA is rolled over from one institution to another. A rollover of IRAs funds consists of a complete withdrawal of all money from the account which is then deposited or invested with another IRA custodian within 60 days of receipt. Transfers also do not incur penalties or fees as they usually require direct movement of funds between IRA custodians.

If for what ever reason IRA funds are withdrawn and not be deposited into a new Individual Retirement Account those funds could incur significant Federal penalties and have serious tax implications. Publication 590 from the IRS provides a complete overview of which situations may or may not incur the 10% early withdrawal penalty. For example, if funds are withdrawn for use to pay for college tuition they could be exempt from the penalty and the reporting of additional income.

There are additional situations under which funds withdrawn from an IRA may be exempt. Aside from the education exemption already mentioned, funds can also be withdrawn to pay for medical expenses exceeding 7.5% of adjusted gross income. Additional exceptions include funds withdrawn that are being used in the purchase of a first time home or if an individual in the household becomes disabled.

Closing an Individual Retirement Account prior to age 55 at which point mandatory disbursements become required can be financially troublesome. It may actually cost less money to take out a long-term loan from a bank and pay the interest then it would to pay the penalty in taxes on funds withdrawn from a terminated IRA.

Individual Retirement Accounts can be wonderful investment vehicles to ensure long-term financial security however it is important to fully understand and read all documentation concerning transfers, rollovers, penalties, and termination fees associated with an IRA. Individual Retirement Accounts are meant to plan for the future and when viewed as such, any short term gain from early termination for withdrawal often is not as beneficial an leaving the money in an Individual Retirement Account.