How to Redeem a Roth IRA
- 1). Investigate your options. If you are closing out your Roth IRA, you are technically moving your deposited funds out into another account. As such, you need to decide where you want your funds to go, and what the consequences of each decision will be. You have three primary choices of how to close out your Roth IRA: liquidation, wherein you sell your Roth funds and move them into a personal account, such as a checking account; trustee-to-trustee transfer, in which you rollover your funds into another Roth IRA account; or recharacterization, where you move your Roth funds into a traditional IRA account.
- 2). Examine your tax consequences. For a trustee-to-trustee rollover, there are no taxes. While you are closing out one Roth IRA, in such a transfer there are no distributions, and therefore no taxes or penalties. For a liquidation, there may or may not be tax consequences. The IRS has certain restrictions to the tax-free nature of Roth distributions--for example, your funds need to have been in the Roth for more than five years, and you must be older than 59 1/2 years of age--but beyond that, most distributions from the Roth are tax-free. For recharacterizations, you may want to consult a tax adviser. Although the strategy can help you save on taxes, the calculations can be confusing, and there are time restrictions involved.
- 3). Contact your financial institution. Once you have determined an appropriate course of actions, your firm can redeem your Roth IRA and move the assets as you designate. Make sure that your instructions are followed in a timely manner. For the recharacterization and trustee-to-trustee transfer options, your transaction must be completed within 60 days of its origination. For all options, check back for any dividends, interest or reinvested mutual fund shares that may have hit your account since your transfer. Especially before year-end, make sure that your account is empty and fully-closed. If you still have activity in your account in the new year, that may result in required tax filing for the following year, which will be additional work for an account that you no longer wish to have.
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