Almost six years ago I opened a Roth IRA in a brokerage account. I started the account with just $500, and I did it as more of a favor to the financial adviser that worked for the bank. Needless to say, I haven’t made any contributions to it since I actively contribute to my 401k offered through my employer. Every year there is a $15 annual fee, and each year the Roth IRA automatically sells some of my mutual funds to pay for that annual fee. In addition to losing money with the annual fee for the brokerage account, the value has gone down due to the stock market fluctuations.
I’ve been contemplating closing out my Roth IRA. It doesn’t make sense to have an account that costs me money each year that I’m not going to make contributions to. I talked with my financial adviser and she agrees that we should just close it out. It doesn’t make sense financially. I’ll keep contributing to my 401k, and we’ll leave Mr. Money’s Roth IRA as it is (it’s also a brokerage account, but he’s got more money in it). She did tell me that there is a penalty for closing out the Roth IRA early, but it’s really not a big deal.
Roth IRA Early Withdrawal Penalties
Since I am not over 59.5 years old, I will incur a penalty of 10% for closing out my Roth IRA early. I believe that my Roth IRA account balance is around $300. When I do my taxes, I’ll have to claim that and that’s when I will incur the 10% penalty. $30 isn’t going to make or break me (in fact, if I left the Roth IRA as it is, that’s two years of annual fees!). My thinking is that I would rather pay the 10% penalty and not worry about the annual fee or losing even more money. The truth of it is, I probably shouldn’t have opened the Roth IRA in the first place!
Saving for Retirement
I’ll continue to save for retirement through my employer’s 401k plan. I contribute 6% of my annual pay each pay period, and that seems like it’s a pretty good amount for us at the moment. We also throw a chunk of money into a regular savings account each month, and that money could be reallocated in the future towards retirement if we so desire. I like the flexibility of having the money in the savings account versus having it in a retirement account. Who knows if we’ll decide we never want to retire and we want to use the money without penalty?
After talking with my financial adviser, it seems like it’s the right thing to do an early withdrawal on my Roth IRA. Even though I’ll incur that 10% penalty, I’m still better off than leaving that small amount of money in the brokerage account to be eaten away by losses and fees. It just doesn’t make any sense to me.