<p>Should i sock away my paychecks into the 401K for the rest of 07 to lower my income if I have not reached the 401k limits? Or will Financial Aid gods see those big contributions as available funds for paying for college? Thanks. We have some FAFSA and some Profile schools.</p>
<p>If you are talking about finaid for the 2008-09 year, the amount you “sock away” during the 2007 tax year will be considered as income for that tax year when you are doing your finaid applications. If you look at a FAFSA, you will see that the amount CONTRIBUTED during the tax year (for 2008-09 finaid, the tax year will be 2007) is added on. The amount of the BALANCE in your 401K is not considered as an asset (like a savings account, for example). But that is very different than the contribution MADE in the year of your FAFSA.</p>
<p>Short answer…socking away right now will have no reduction in your income on the Finaid forms for the upcoming year.</p>
<p>But socking away now might be best for your retirement planning and the assets in the 401k will not be counted as assets whereas they will count if they are sitting in a money market fund not a retirement plan</p>
<p>Also, I’ve done the math – there is a slight increase to EFC because the 401K contributions are “untaxed” income – however, the tax savings that result from the deduction are generally much higher. So overall, if you are financially able to manage, its usually better to keep making those 401K contributions.</p>
<p>The tax “savings” are higher, but they are only deferred. The increase in EFC is forever. In effect, your college expects you to pay a percentage of the tax liability that you are deferring, money you can never get back. It might be better to take the income now, pay the taxes, and get a lower EFC.</p>
<p>If you are lucky enough to have a Roth 401k (post tax), it would be a suitable method to get assets out of the “taxation” of the dreaded FA calculator. Roth IRAs work in the same manner.</p>
<p>No retirement savings escapes the income “taxation” of the dreaded FA calculator. Your pre-tax deductions for IRAs/401Ks are added back in later on in the process. </p>
<p>Roth (post tax) contributions allow you to be more efficient in salting away assets from FA taxation than conventional (pre-tax) contributions. </p>
<p>Consider the following:</p>
<p>If you decide to put 12K into a conventional 401K, the net deduction from your take home pay (assuming a 25% marginal tax bracket for simple calculation) would be 9K with the 3K coming from deferred taxes from uncle sam. So only 9K comes out of your assets (assuming here that you are replacing the drop in your net pay from FA taxable savings account).</p>
<p>If you instead decide to put 12K into a Roth 401K, there will be a 12K decrease in your net pay (nothing from uncle sam here), and once again assuming that you are replacing the drop in your net pay from savings, 12K will come out of your FA taxable savings account.</p>
<p>IIRC the maximums per year are 15K for 401Ks, so the difference in the amount you can bury in the retirement account (if it is being shifted from a FA taxable savings acct) between pre-tax and post-tax contributions would be about $3750.</p>
<p>While 5% (a typical FA taxation rate on non-retirement assets) of $3750 isn’t much, (~$188), if you do it 4 years in advance and also do a Roth IRA ($4K per taxpayer), it could mean a $1000 lower EFC per year for all 4 years vs. the same contribution to a conventional (pre-tax) IRA/401K (plus a nice chunk of change set aside for retirment that will never be taxed).</p>
<p>Disclaimer - I am not a tax advisor, so consult your own.</p>
<p>I put the max into my 401K this past year, plus 5k into my Roth and 5k into my wife’s, plus did the 5k make-up because I am over 50. So I put away about $30k in '07. We are a one-income family.</p>
<p>Guess what my EFC is? $32K! I thought I was being slick. They figure if I can save it, I can give it to them.</p>
<p>Trouble is, I was partially living off rainy day funds in my credit union in order to sock so much into the retirement funds. I couldn’t do this year in and year out…but I wanted to draw down the non-retirement account cash.</p>
<p>I may have shot myself in the foot! :(</p>
<p>Oops tarbe - assets in retirement funds are not counted by FAFSA but current year income is not reduced by current year contributions - they are added back by the formula. </p>
<p>They need to do a college course for parents about 2 years before the kids go to college - how the financial aid formulas work!!</p>
<p>Yes, but a course for parents would be useful only if there really are things that could be done to reduce the EFC. So far it does not seem that those things really can be done.</p>
<p>Katie</p>
<p>We started learning about financial aid when my son was a sophomore in high school. It was very beneficial in our situation.</p>
<p>Paying for College Without Going Broke by Kalman Chany was the most helpful to us.</p>
<p>Max out your 401K as often as possible. You CAN borrow for college. You CAN’T borrow for retirement.</p>