I opened a Roth IRA this year and have had it for two months. I’ve only contributed $35 and have made 0.10 cents gains. Can I close the account without penalty?

[Tosha]

cont’d; The account was created via a robo advisor app (Acorns) and I no longer want to deal with them. I’m in my twenties (age). I keep reading about a 10% penalty for early withdrawals and I don’t know how that works with .10 cent gains. Just frustrated and confused.

[macuser_22 · Accepted solution]

Yes.  Ask the plan administrator for a "return of contribution", not just a normal distribution.     You have until April 15, 2021 to have a 2019 contribution returned tax free (You only pay tax on any earnings.)

[Bsch4477]

If you contribute and then withdraw within the same tax year, then the contribution is treated as if it were never made.

[macuser_22]

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@Bsch4477 wrote:

If you contribute and then withdraw within the same tax year, then the contribution is treated as if it were never made.

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Not exactally.  It is still reported to the IRS both on a 5498 form and a 1099-R.   Only if it is revoked within 7 days is it treated as never happening.

And you have until the filing due date of the tax return  for that tax year (Apr 15, 2021 for a 2020 tax year contribution) or Oct 15, 2021 if a timely extension is filed.

[dmertz]

Although not relevant to the original question, an account revocation and a return of contribution are treated exactly the same.  A distribution upon account revocation is reported as a return of contribution.

Regarding the original question, there are two differences between obtaining a regular distribution and a return of contribution:  1) the return of contribution would preserve the option to make a future contribution (up to the deadline for making such a contribution) for the tax year for which the returned contribution was made while a regular distribution does not, and 2) making a regular distribution retains the original contribution as establishing the beginning date of first Roth IRA contribution for the purpose of meeting the 5-year requirement for making qualified distributions (not particularly meaningful for someone under age 59½ unless they become disabled or wish to take a distribution from a future Roth IRA that includes Roth earnings for a first-home purchase after having completed the 5-year qualification period).  The tax consequences of the distribution of this $350.10 would be are the same either way.

If the issue is with the custodian and the types of investments they offer, and not the fact that the Roth IRA contribution was made in the first place, just move the IRA by non-reportable trustee-to-trustee transfer to a more desirable custodian.  Being relatively young is an ideal time to make Roth IRA contributions since it provides maximum opportunity for growth that will be tax-free once the requirements for qualified distributions are met.

[Bsch4477]

pub 590-B

Withdrawals of contributions by due date.

If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

[macuser_22]

Correct.    It is by the due date, not in the same year.   That is what I was commenting on.

[dmertz]

Regarding the paragraph in Pub 590-B, that paragraph refers to an explicit return of contribution.  Even though the contribution can be distributed as a return of contribution, it doesn't have to be as long as the contribution wasn't an excess contribution.  The amount contributed can be distributed by making a regular distribution instead, even if it is before the due date of the tax return.  That would allow the earnings to remain in the account (which would be wise if the earnings were substantial) and not be subject to tax or penalty.  In this case the distinction doesn't matter much since the earnings are only $0.10.