How to Close an IRA: Rollover, Taxes, and Penalties

To close an IRA, you either take the full balance as a cash distribution or move it into another retirement account through a rollover or trustee-to-trustee transfer. Learning how to close an IRA really means choosing between those two paths, because the tax bill on a cash-out from a Traditional IRA can be enormous, while a rollover keeps every dollar tax-deferred. If you don’t need to spend the money, roll it over. If you do need it, understand what you’ll owe before you sign the distribution form.

Cash Out or Roll Over

The first decision is what you want the money to do. Consolidating accounts or switching custodians calls for a rollover. Needing cash for living expenses, debt, or a purchase means a distribution. The IRS treats these very differently.¹

A full distribution means the custodian liquidates your holdings and sends you the proceeds. For a Traditional IRA, every dollar of that distribution (minus any nondeductible contributions) counts as ordinary income for the year you receive it.² Closing a $150,000 Traditional IRA on top of a $75,000 salary can push you well into a higher bracket. People underestimate this, and the surprise arrives in April.

A rollover or trustee-to-trustee transfer moves the balance into another qualified plan or IRA. No tax is owed on the transfer, and the old account closes once the balance hits zero.¹

How to Move the Money Without Triggering Tax

If you’re rolling over, the mechanism matters. There are two, and picking the wrong one can cost thousands.

A direct rollover, also called a trustee-to-trustee transfer, sends the money straight from your old custodian to the new one. You never touch it. Nothing is withheld, no deadline applies, and there’s no cap on how often you can do this in a year.³ Use this method whenever you can.

An indirect rollover means the custodian sends the money to you, and you have 60 days to deposit it into another IRA or retirement plan. Miss that window and the IRS treats the whole amount as a taxable distribution. The IRS can waive the deadline if you missed it for reasons beyond your control, but that’s not something to plan around.⁴ There’s another catch. The custodian withholds 10% for federal taxes unless you specifically elect out. To roll over the full original amount, you have to come up with that withheld 10% from other funds and deposit the complete balance within the 60 days. Any shortfall becomes a taxable distribution.³

One more limit: only one indirect IRA-to-IRA rollover is allowed in any 12-month period, and the cap applies across all your IRAs combined, including Traditional, Roth, SEP, and SIMPLE accounts. Trustee-to-trustee transfers don’t count against it.³

What a Cash-Out Costs on a Traditional IRA

When you close a Traditional IRA with a full distribution, the entire amount is included in your gross income for the year and taxed at ordinary income rates.⁴ The only portion that escapes tax is the total of any nondeductible contributions you made, since you already paid tax on that money going in. You track those contributions on IRS Form 8606.²

A large single-year distribution can push you into a bracket you’ve never been in and can also raise your Medicare premiums, make more of your Social Security taxable, and cost you certain credits. For a sizable account, splitting the distribution across two tax years (partial withdrawal in December, remainder in January) can reduce the total tax. The account stays open until the second withdrawal, so this only works if timing allows.

What a Cash-Out Costs on a Roth IRA

Roth IRAs work differently because you funded them with after-tax money. When you close one, your contributions come out first, tax-free and penalty-free, regardless of your age or how long the account has been open. Conversion amounts come out next. Earnings come out last.²

The earnings portion is where the rules tighten. For earnings to come out tax-free and penalty-free, two conditions must both be met: you must be at least 59½, and at least five tax years must have passed since your first contribution to any Roth IRA. If either is missing, the earnings portion may owe income tax plus the 10% early withdrawal penalty.² The five-year clock starts on January 1 of the tax year of your first contribution, so a contribution made in April 2022 for tax year 2021 starts the clock on January 1, 2021.

If you’ve had the Roth for more than five years and you’re past 59½, you can close it and take everything without owing a cent. That’s a meaningfully different outcome from closing a Traditional IRA of the same size.

The 10% Early Withdrawal Penalty

Under 59½ and taking a cash distribution from a Traditional IRA? The IRS adds a 10% additional tax on top of the regular income tax on the distribution.⁵ On a $100,000 distribution, that’s an extra $10,000 before income tax enters the picture. You report and pay it on IRS Form 5329.

Several exceptions spare you from the 10% penalty even before 59½:⁶

Permanent and total disability of the account owner.
Distributions to a beneficiary after the owner’s death.
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
Health insurance premiums paid after receiving unemployment for at least 12 weeks.
Qualified higher education expenses for you, your spouse, or dependents.
Up to $10,000 toward a first home purchase.
Substantially equal periodic payments based on life expectancy.
Distributions due to an IRS levy on the account.
Up to $5,000 per child for qualified birth or adoption expenses.
Up to $22,000 for economic loss from a federally declared disaster.
Domestic abuse victim distributions up to the lesser of $10,000 or 50% of the account, for distributions after December 31, 2023.
One emergency personal expense distribution per year up to the lesser of $1,000 or the vested balance above $1,000, for distributions after December 31, 2023.

These exceptions waive only the 10% penalty. On a Traditional IRA, you still owe regular income tax on the distribution. A rollover avoids both the penalty and the income tax, so if there’s any way to move the money instead of cashing it out, that path is almost always cheaper.

Choose Your Tax Withholding

When you take a cash distribution, the custodian uses IRS Form W-4R to set federal withholding.⁷ The default rate on IRA distributions is 10% of the taxable amount. You can elect zero, or request a higher percentage. Skip the W-4R entirely and the custodian applies the 10% default.³

The 10% default is often not enough. In the 22% or 24% bracket, withholding only 10% leaves a large balance due at filing and may trigger an underpayment penalty. For big distributions, ask for withholding that matches your expected marginal rate, or make estimated payments separately. Many states also require or allow state income tax withholding on IRA distributions, and the closure forms include a section for that election. A direct rollover or trustee-to-trustee transfer sidesteps the whole withholding question because no taxable distribution occurs.

If You’re 73 or Older: RMDs First

At 73 or older, the IRS requires an annual minimum withdrawal from your Traditional IRA, calculated on the prior year-end balance and your life expectancy. Your first RMD is due by April 1 of the year after you turn 73; every RMD after that is due December 31.⁸

Closing the IRA with a full cash distribution satisfies the RMD for that year, since you’ve withdrawn more than the required minimum. You can’t carry any excess forward to cover future RMDs in other accounts.² Closing via rollover has an important wrinkle: the RMD amount for the year cannot be rolled over. Take the RMD portion as a distribution first, then roll over the remainder. Rolling over the RMD amount creates an excess contribution in the receiving account, which is its own penalty.

Roth IRAs have no RMDs during the original owner’s lifetime, so none of this applies to closing your own Roth.

The Paperwork and Timing

To start, gather your account number, Social Security number, and most recent statement showing your balance and any pending transactions. Most custodians offer a distribution request or account closure form through their online portal, or by phone. Identify the account type (Traditional or Roth) correctly, because processing rules differ.

For a rollover, provide the receiving institution’s name, mailing address, and the account number where the funds should go. Call the receiving institution first to confirm what they need. Some custodians require a letter of acceptance from the receiving institution before initiating the transfer.

Many custodians accept scanned uploads through a secure portal or digital signatures. If digital options aren’t available, fax to the custodian’s processing department. High-value accounts or transfers of securities (rather than cash) may require a Medallion Signature Guarantee, a certification stamp from a bank or financial institution that verifies your signature. Not every bank branch offers Medallion Guarantees, so call ahead.

Processing typically takes five to ten business days. The custodian liquidates remaining investments to cash (unless securities are transferring in-kind) and issues the funds through your chosen delivery method. Wire transfers usually carry a fee, and paper checks add mail time. Once the balance reaches zero, the account is formally closed.

Closing an Inherited IRA

If you inherited an IRA from someone who died after 2019, the closure rules depend on your relationship to the original owner. Surviving spouses have the most flexibility, and can roll the inherited IRA into their own and follow the standard rules for their age.

Most other beneficiaries fall under the 10-year rule: the account must be emptied by December 31 of the tenth year after the original owner’s death.⁹ If the owner had already started RMDs before death, non-spouse beneficiaries must also take annual distributions during those ten years. If the owner died before their RMD start date, beneficiaries can time distributions freely within the 10-year window to manage taxes.

A small group of “eligible designated beneficiaries” can still stretch distributions over their own life expectancy: minor children of the deceased (until they reach majority), disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased. Once a minor child reaches adulthood, the 10-year clock starts.

Closing an inherited IRA is taxed like any other distribution. Inherited Traditional IRA distributions are ordinary income; inherited Roth IRA qualified distributions remain tax-free. The 10% early withdrawal penalty does not apply to inherited IRA distributions, regardless of the beneficiary’s age.⁶

What to Expect at Tax Time

In January or February after you close the account, your former custodian sends you IRS Form 1099-R reporting the distribution. Box 1 is the gross amount, Box 4 is federal income tax withheld, and Box 7 has a distribution code identifying what type of distribution occurred.¹⁰ Common codes include “1” for an early distribution (under 59½), “7” for a normal distribution, and “G” for a direct rollover.¹¹

You report the distribution on Form 1040, line 4a for the total and line 4b for the taxable portion. If you completed a rollover, put the total on 4a, zero on 4b, and write “Rollover” next to the line. If the early withdrawal penalty applies, use Form 5329 to calculate and report it. Keep your 1099-R with your tax records; the IRS gets its own copy and will match it against your return.²

1
Internal Revenue Service. Topic No. 413, Rollovers from Retirement Plans
2
Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements
3
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
4
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
5
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Internal Revenue Service. About Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
8
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
9
Internal Revenue Service. Retirement Topics – Beneficiary
10
Internal Revenue Service. Instructions for Forms 1099-R and 5498
11
Internal Revenue Service. Form 1099-R Instructions for Recipient