So… when I was in my early 20s, I had a chunk of money (think 2006, pre real estate crash) I was convinced to put into an IRA that was invested somehow in commercial real estate. (Terrible investment yes…it was a REIT – real estate investment trust)
It was ~$27k and over the next two years became about ~$6k. Because so many people lost so much money the investment company had some kind of deal where you could move it at even less money or leave it until you could take a qualified disbursement. I did try to move it a few times over the years but it always was almost impossible and would have made what likely was left worth so much less it was just ridiculous.
So I've been calling it my "pretend money" for years as it was money I couldn't figure out how to do anything with or access in any useful way.
Fast forward another 15+ years and it's floated slowly up to about $13k.
My spouse is now in grad school which seems to present a unique opportunity!
I did talk to the company and even though at first they didn't think it was eligible to pay a spouses tuition as a qualified disbursement I presented them a few IRS websites to the contrary and they're now agreeing it can. YAY! It might actually be real money and I might have a way to empty the account without too much more loss. That said, you can probably guess how much I trust this company, so yes I would prefer to ask strangers on reddit the following:
-
If I take money out of an IRA for a spouses tuition, my understanding is that its a qualified disbursement and there is no 10% penalty or other penalties. HOWEVER, as it's an IRA i believe that the withdrawal amount may have a taxable portion. But is it just the income that's taxed or also the basis? If the investment return only since it was such a loss, do I owe anything in taxes? I believe it was after tax money that was invested even though its a traditional IRA since it was literally money that had been in a bank account for years before it was put in. But I'm not sure how id prove that years later. I asked the company and they had no idea.
-
If I would owe taxes on it as income, that's okay, but would I also be able to declare some kind of loss like a capital gains loss? How would that work? How much could I claim?
-
If I pull all this money out as tuition over the next year (all in 2026) can I also contribute money to a Roth IRA? (Up to the Roth limit)
(My ideal world is i get all the money out of this account,offset tuition and then put what I can into my existing Roth which HAS done well and is much better invested with Fidelity vs this random company that I do not trust that's done not much from my POV but lose money, charge fees, and hold it hostage. Is this feasible?)
IRA educational disbursement questions for a very depreciated IRA
byu/DragonBard_Z intax
Posted by DragonBard_Z
3 Comments
Yes, tuition expenses for your spouse are exceptions to the 10% penalty.
Most likely you fully deducted your IRA contributions when you made them and you have no “basis” in your IRA. If you had made non deductible IRA contributions they should have been reported on Form 8606. You cannot deduct investment losses in an IRA, you will owe taxes on the distribution unless you can show that you made non deductible IRA contributions.
You can contribute to a ROTH in the same year as you take distributions from an IRA.
Unfortunately to answer your questions you would need to go back to 2006 and how you filed your taxes.
But something is off with your story – in 2006 the contribution limit for an IRA was $4000. How did you get to $26k? Did you contribute in chunks over years? Or are you saying it was all at once? Are you sure the money came from a regular account, and not from some other retirement account?
> But is it just the income that’s taxed or also the basis? If the investment return only since it was such a loss, do I owe anything in taxes? I believe it was after tax money that was invested even though its a traditional IRA since it was literally money that had been in a bank account for years before it was put in. But I’m not sure how id prove that years later. I asked the company and they had no idea.
Only the gain would be taxable. But you’re right that you’d only have basis if you made nondeductible contributions. If your contributions were deductible, then you have no basis and everything would be taxable.
But I wouldn’t assume your contributions were nondeductible just because you transferred it from your bank account. That’s the only way to put money in an IRA.
It would depend on whether you were covered by an employer plan and whether you were above the taxable income threshold in the years you made the contributions. Looks like the 2006 the taxable income threshold was at $50k. https://www.irs.gov/pub/irs-prior/p590–2006.pdf (Page 19.)
Were you making over $50k and covered by an employer’s 401k plan circa 2006? If both of those were true, you might have made nondeductible contributions. Otherwise your contributions were probably deductible. And if you can’t prove your contributions were nondeductible, you probably shouldn’t assume they are.
> If I would owe taxes on it as income, that’s okay, but would I also be able to declare some kind of loss like a capital gains loss? How would that work? How much could I claim?
Prior to 2018 you could have taken a miscellaneous itemized deduction if you completely closed out all of your Traditional IRAs and had a net loss (again, assuming you have basis). In 2025 there’s no Federal deduction for IRA loses. Some states still allow the itemized deduction (California for instance).
> If I pull all this money out as tuition over the next year (all in 2026) can I also contribute money to a Roth IRA? (Up to the Roth limit)
Yes, the two would not be related.
With all that said, you could also just roll over the IRA directly into your Roth IRA (or even just to a new Traditional IRA somewhere else, and invest it in something better!) Then you’d still have that money in an IRA saved for your retirement. If you can afford to do that and just pay the school expenses out of pocket, that would probably be better.