I have a question I can’t seem to find the answer to. I have heard that the colleges add back the contributions made to a 401k. My ex’s plan is to continue to contribute his 401k and use that to help pay for college by taking a distribution. Does this mean it will be counted twice? Once as income from work and again as a retirement distribution? Of course, it won’t be counted as assets if it is in the 401k. However, he has so little saved that I believe any saved in a non-retirement account will be exempt. Perhaps a payment plan with the college would be better for him? Honestly, I am pleased that he has agreed to contribute something as I didn’t expect anything from him.
Yes, counted twice if you do it in the same year (contribute and then take a withdrawal). If it is a FAFSA only school and you are the custodial parent, it won’t matter as his income won’t be reported. If a CSS school, maybe they will see the situation and not count it twice.
ETA…I am not a financial planner or advisor…just a parent!
His contributions will be added back as income. If he takes distributions, those will be considered income.
And if the money is sitting in his bank account the day he files his financial aid application forms, it will be considered an asset.
Why doesn’t he just reduce his contribution TO his retirement and use that to pay college costs? If he does that, his income wouldn’t be affected for financial aid purposes…except that he would have higher taxable income for the year. But for financial aid purposes, his contributions would be included as income anyway!
He would leave whatever is IN his retirement accounts to continue to grow.
When your kiddo is a freshman…file the financial aid applications as early as possible. The assets are of the date of the initial filing.
Then reduce the retirement contributions…and instead put that money into a dedicated savings…or a 529. The following year…make sure the account has as little as possible in it before the financial aid applications are filed.