How to Close an IRA Account: Rollovers, Penalties, and RMDs

To close an IRA account, request a distribution or account closure form from your custodian, decide whether the money is being cashed out or moved to another retirement account, complete the tax withholding elections, and submit the form. Most closures finish within three to ten business days once the custodian has your paperwork. The decision that matters most is not the form itself but the distribution method you pick on it, because a direct transfer to another IRA moves the balance with no taxes owed, while cashing out a traditional IRA turns the entire balance into taxable income for the year.

Pick How the Money Leaves the Account

The distribution method you select on the closure form is the single biggest decision in this process. It determines whether you owe taxes now, later, or not at all.

Direct Trustee-to-Trustee Transfer

If you’re moving funds to another IRA, a direct transfer between custodians is almost always the right choice. Your current custodian sends the money straight to the new one and you never touch it. No taxes are withheld, no taxable event occurs, and the one-rollover-per-year limit doesn’t apply because a direct transfer isn’t classified as a rollover.¹ You’ll need the new custodian’s name, mailing address, and your account number at the receiving institution on your closure paperwork.

Full Cash Distribution

The custodian liquidates everything in the account, withholds taxes, and sends you the remaining balance as a check or electronic transfer.¹ Clean if you actually need the cash. Expensive for a traditional IRA, because the full amount becomes taxable income that year. If you want the money wired, you’ll need to provide the routing number and account number for the receiving bank.

Indirect (60-Day) Rollover

With an indirect rollover, the custodian sends the distribution to you and you have 60 days to deposit the full amount into another qualified retirement account.¹ This is where closures go sideways. Your custodian withholds 10% for taxes when the check goes out, which means you receive less than the full balance. To complete the rollover and avoid taxes on the missing piece, you have to deposit the entire original balance, replacing that withheld 10% from your own pocket, within the 60-day window. Miss the deadline or come up short, and whatever you didn’t roll over becomes taxable income plus the 10% early withdrawal penalty if you’re under 59½.

The IRS also limits you to one indirect rollover from any IRA to any other IRA within a 12-month period, and it aggregates all your IRAs (traditional, Roth, SEP, and SIMPLE) for purposes of this limit.¹ A second indirect rollover within 12 months is treated as a taxable distribution. Direct trustee-to-trustee transfers have no such limit.

What You’ll Owe If You Cash Out a Traditional IRA

When you close a traditional IRA and take the money, the entire distributed balance counts as ordinary taxable income for that year.² A $150,000 balance stacked on top of your other income can push you into a significantly higher bracket than you’re used to.

If you’re under 59½, the IRS adds a 10% early withdrawal penalty on the taxable portion.³ On that $150,000 example, the penalty alone would run about $15,000, before regular income tax. The combined hit can easily consume a third or more of the balance.

Your custodian will automatically withhold 10% of the taxable amount for federal income tax unless you opt out or request a different percentage.¹ That default 10% rarely covers what you’ll actually owe on a large balance. If you expect your effective tax rate to be higher, increase the withholding on the form or set money aside for April.

Exceptions That Waive the 10% Penalty

Even if you’re under 59½, the tax code carves out exceptions that eliminate the 10% penalty. The most commonly used include:⁴

Total and permanent disability of the IRA owner.
First-time home purchase, up to $10,000.
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
Qualified higher education expenses for you, your spouse, or dependents.
Health insurance premiums while unemployed, if you received unemployment compensation for at least 12 weeks.
Substantially equal periodic payments taken over your life expectancy using an IRS-approved method.
Birth or adoption expenses, up to $5,000 per child.
Federally declared disaster, up to $22,000 for individuals with a qualifying economic loss.
Domestic abuse victims, up to the lesser of $10,000 or 50% of the account, for distributions made after December 31, 2023.
Distributions taken because the IRS levied the account.

The exception only waives the extra 10%. Regular income tax on a traditional IRA distribution still applies. If the distribution code on your Form 1099-R doesn’t reflect the exception, you’ll need to file IRS Form 5329 to claim it.⁴

Roth IRAs Close on Different Rules

Closing a Roth IRA is less painful because you already paid income tax on your contributions going in. You can withdraw your original contributions at any time without owing taxes or penalties.⁵

Earnings are the tricky part. For those to come out tax-free, the distribution must be “qualified,” meaning you’re at least 59½ and the account has been open for at least five years. Close a Roth before meeting both, and the earnings portion gets taxed as ordinary income and may also face the 10% penalty. The IRS treats contributions as coming out first, then conversions, then earnings last. So if you contributed $50,000 over the years and the account grew to $65,000, the first $50,000 you withdraw is tax-free regardless of your age or how long the account has been open.

Inherited IRAs

If you inherited an IRA from someone who died after 2019 and you’re not a spouse, minor child, disabled, or chronically ill beneficiary, you generally must empty the account within 10 years of the original owner’s death. If the original owner had already started required minimum distributions before they died, you may also need to take annual distributions during that 10-year window rather than waiting until year 10 to take everything at once.

Spousal beneficiaries can roll the inherited IRA into their own IRA and treat it as theirs, which resets the distribution rules. The closure paperwork is the same as any other IRA, but the tax treatment differs: distributions from an inherited traditional IRA are taxable income to the beneficiary, and the 10% early withdrawal penalty generally does not apply regardless of the beneficiary’s age.⁴

The Paperwork

Before you contact your custodian, gather your full legal name, current address, Social Security number, and the account number for the IRA you’re closing. If you’re doing a transfer or rollover, add the receiving institution’s name, address, and your account number there.

The form is typically called an IRA Distribution Request or Account Closure Form. Most custodians make it available on their website or client portal.⁶ If you can’t find it, a phone call to customer service will get one sent. The form includes federal and state tax withholding elections; for traditional IRAs, the custodian must apply the 10% federal default unless you affirmatively elect otherwise. State withholding varies by state.

Medallion Signature Guarantees

Some custodians require a Medallion Signature Guarantee for account closures, especially when transferring assets to a different firm. This is a special certification stamp, different from a notary, that verifies your identity and confirms you have legal authority to move the funds.⁷ You can obtain one at a bank or credit union where you hold an active account. Not every branch offers the service, so call ahead.

If you can’t get one, some custodians accept alternatives: verification through their secure website with multifactor authentication, phone confirmation to the number on file, or in some cases a notarized signature. Requirements vary by firm and transaction size, so ask before you assume.

Closure Fees

Some custodians charge a termination fee when you close an IRA. Among major brokerages, these range from $0 to $100. Fidelity, Schwab, and Interactive Brokers charge nothing; others fall in the $50 to $100 range. Check your custodian’s fee schedule before initiating the closure.

If You’re 73 or Older, Take the RMD First

If you’re 73 or older, you’re required to take a minimum distribution from your traditional IRA each year.⁸ Fully cashing out satisfies that year’s requirement, but if you’re transferring the IRA to a new custodian rather than cashing out, take the current year’s RMD before completing the transfer. The new custodian won’t calculate it based on the old account’s history.

Your first RMD is due by April 1 of the year after you turn 73. Every year after that, the deadline is December 31.⁹ Missing an RMD triggers a 25% penalty on the amount you should have taken.

Timeline and the 1099-R

Once your custodian has the completed paperwork, most closures process within three to ten business days. During that window, the custodian liquidates any remaining investments and converts everything to cash before disbursing. Holdings that take longer to settle can stretch the timeline. A final account statement showing a zero balance is your confirmation the account is closed.

By January 31 of the following year, the custodian must send you IRS Form 1099-R reporting the distribution.¹⁰ You’ll need it to file your tax return for the year the account was closed. If you did a direct trustee-to-trustee transfer, you’ll still receive a 1099-R, but the distribution code should show a nontaxable transfer. Check it. A wrong code can leave you assessed taxes on a transfer that shouldn’t be taxable, and the former custodian can correct errors after the fact.¹¹

1
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
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Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions Withdrawals
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Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities, Certain Proceeds of Endowment and Life Insurance Contracts
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Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
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Internal Revenue Service. Roth IRAs
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Fidelity Investments. IRA Distribution Request
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Investor.gov. Medallion Signature Guarantees – Preventing the Unauthorized Transfer of Securities
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Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
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Internal Revenue Service. Retirement Topics – Required Minimum Distributions RMDs
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Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
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Internal Revenue Service. Maintaining Your Retirement Plan Records