closing Roth IRA early: what will it cost me?

Question

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!

Answer 1

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.

Answer 2

There are ordering rules for distributions from a ROTH IRA. The first amount distributed is your $2,000 initial investment. This amount is not subject to tax nor the 10% early withdrawal penalty.
The next amount would be a distribution of income. This amount would be subject to income tax and the 10% early withdrawal penalty. The tax and penalty are due either quarterly if you would be in an underpayment situation. As long as your withholding and estimated tax payments for 2007 are enough to keep you out of a penalty situation you would then pay the tax and penalty with you tax return.
There are several exceptions to the 10% penalty such as if for qualified higher education expenses, medical insurance, etc.
If you can get away with the $2,000 only you would be better off unless an exception to the penalty applies.

Answer 3

Only if you had put it back in within 60 days of the withdrawal. Unfortunately, you're well past that point.

Answer 4

You pay the 10% right away. The remaning will be taxed on your yearly income.