Can You Sell Your IRA for College Hardship With No Penalty?

by Mark Kennan

The IRS does not permit you to sell your IRA, but you can make a withdrawal for the entire value of the IRA. IRAs do not have specific hardship withdrawal rules like a 401(k) plan because you can take money out at any time, though a penalty applies to withdrawals when you take nonqualified distribution, which refer to distributions before age 59 1/2.

Avoiding the Penalty

The IRS allows you to avoid the early withdrawal penalty if you use the distribution to pay for post-secondary educational expenses. The early withdrawal exception is more liberal than the educational tax credits because you can include not only tuition and mandatory fees, but also room and board if the student is enrolled at least half-time. "Half-time" means the student is taking at least half the number of hours required to be considered a full-time student at the school. In addition, the IRS does not limit the amount you can take out of the IRA each year for the post-secondary education exception.

Who's Eligible

The exemption from the early IRA withdrawal penalty is not limited to the owner of the IRA. Instead, you can take a withdrawal from your IRA without penalty to pay for the qualifying costs of your spouse or your dependents. For example, you could take out money to pay for your child's college education without having to pay an early withdrawal penalty even if you are not yet 59 1/2 years old.

Cashing Out a Roth IRA

When you take an early distribution from a Roth IRA, only the earnings count as taxable income; contributions are not taxable. Since the early withdrawal penalty only applies to taxable distributions, your contributions come out tax-free. For example, if your Roth IRA had $41,000 and $29,000 were contributions, subtract $29,000 from $41,000 to find that if you cashed out your Roth IRA to pay for college you would have only $12,000 in taxable distributions.

Tax Reporting

When you file your income tax return, you start with Form 8606 if you took money out of a Roth IRA to figure the taxable and nontaxable portions. Any withdrawal with a taxable portion must complete Form 5329. This form typically calculates the early withdrawal penalty, but it is also used to denote which reason you claim to avoid the early withdrawal penalty. After noting your exception with Form 5329, report the taxable amount of the distribution on line 15b of your Form 1040 tax return and the nontaxable portion on line 15a.

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