First: please only post an answer if you know what you’re talking about! Thanks!
Question: I have a Roth IRA that was opened in 1998 with an initial investment of $2000. I have not contributed or done anything with it since and it is now $6717. Due to a personal financial crisis that will not resolve itself any other way, I am seriously considering closing my Roth IRA. I’m in my 30’s and my distribution would not qualify for any of the exemptions provided by the IRS. I know that I face a 10% penalty as well as taxes.
How much would I actually get of the $6700 if I close the account, and do I pay the 10% penalty fee & taxes on the distribution upfront or at tax time?
I’m only considering this drastic option because: 1) I really need the money, and 2) I have a 401K building at work…so there is some retirement planning already.
Thanks in advance!
You will pay taxes and penalties on the income in the account ($6717 – $2000 = $4717)
$1,179 Federal Income Tax (Assumes 25% Bracket)
472 10% Federal Penalty
$1,651 Total Federal Taxes
????? State Taxes (Varies by state)
The above example assumes that you are in the 25% bracket. It could be higher or lower depending on your other income. If your state has an income tax, they are going to also want their share.
The trustees usually withhold 20% at the the time of distribution. You pay the rest at tax time.