Should I do a Roth IRA Early Withdrawal?

Posted by Mrs Money on November 22nd, 2010

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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.

Do you think I am doing the right thing with a Roth IRA early withdrawal?

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9 Responses to “Should I do a Roth IRA Early Withdrawal?”


  1. Interesting situation… Have you considered to recharacterize the ROTH funds into a Traditional IRA, then roll those funds into your employer plan?

    I don’t know if they’ll charge you to recharacterize, they shouldn’t, and the closeout fee will be the same whether you rollover or withdraw (usually $50 at most companies).

    [Reply]

  2. mark says:

    Roth IRA contributions can be withdrawn with no penalty or taxes at anytime. Since you opened the account with $500 you can withdraw the $300 balance and you will not incur any penalties.

    [Reply]

    Kelly Reply:

    Yes, I was going to say the same thing! It’s only additional earnings that would incur early withdrawal penalties. Since you have less than you started with, you wouldn’t have to worry about it. Though I personally really like that I have both a Roth and a 401k, so I’m tax-diverse (I dont know if thats a real term, but it sounds good!)

    [Reply]

  3. Kacie says:

    Is there any way you can transfer that money to your husband’s IRA? Or perhaps send it to an IRA that doesn’t have fees so you won’t have to take that penalty?

    It stinks that your account lost money with fees and market fluctuations :(

    I do want to encourage you to consider increasing your retirement contributions if it is in your budget. You have so much time on your side right now — compound interest could do some amazing things for you!

    [Reply]

  4. Little House says:

    It does seem silly to keep an account open that is costing you money every year and not doing much for your total financial worth. I think I’d do the same thing, cash it out and stick the remaining amount into your existing savings account.

    [Reply]

  5. Kacie says:

    I had another comment with links that got held. Just wanted to let you know it’s there!

    [Reply]

  6. Jason says:

    I believe you can transfer your Roth IRA to Vanguard and as long as you elect for electronic delivery of documents there are no annual fees:

    https://personal.vanguard.com/us/whatweoffer/ira/costs?Link=facet

    [Reply]

  7. ChristineWithRegence says:

    Money questions are always tricky! Want to get ideas for how you can help control health care costs? Check out Whatstherealcost.org.

    [Reply]


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