<p>According to the FAFSA calculation 401k money is back in to arrive at total income. This seems very unfair to those who do not have a pension. Those with a pension are not required to add back in any pension money to their total income. How could the calculation be so unfair?</p>
<p>They consider the amount you contributed in the year in question, not the total value of the 401K account.</p>
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Only your contribution to your 401k (for the year) is added back in the FAFSA</p>
<p>I do realize it is only the contribution for the given year, it is still not fair. It allows some to continue to save for retirement during their children’s college years at no financial consequence.</p>
<p>Over a 7 to 8 yr period is a significant sum of money. For low middle income families it has a greater effect.</p>
<p>You are absolutely correct. It is not fair. But them’s the rules. There are a number of unfair things about the financial aid process. Sometimes you get a little, some times you lose. Those who have employers paying for things don’t have to include those. When we pay for them ourselves, it is still included as income. So it’s unfair that we have to pay for things that other people get paid for them, and unfair that FAFSA will not exclude that from income. </p>
<p>My son works for a company that provides for a lot of things including subsidized lunches and lots of freebies when it comes to food, not to mention a full array of other benefits that are rare to find these days. Free parking, free coffee, free breakfast, free medical care for some things, free entry to local venues, the list goes on. None of those freebies show up as income. If he filed FAFSA, he wouldn’t have to include the cost of those things nor does he pay taxes on those benefits. My other son gets nothing in the way of benefits, has to pay for every little thing out of pocket. And if he filed FAFSA they don’t get subtracted out. And yes, my benefit rich son does have a pension and 401 K and only the part he contributes gets added in, none of the employer paid parts, whereas his brother only gets whatever pension he provides in the way of an IRA and that would be added back in as income. The same with health care premiums. You don’t get to deduct them from income and pay with after tax dollars unless you pay so much that you can take a medical deduction (10% of pay in such expenses). But the other one doesn’t pay a dime. Very, very unfair.</p>
<p>THe list goes on–got two kids? If they are in college for overlapping years, you get a break. Your EFC is halved. If they aren’t, too bad. If you are single, your asset allowance is less than half that of those who are married.</p>
<p>cptofthehouse, good post!</p>
<p>cpt, you are correct. It is just difficult for those families whose income is in the lower range but not poor.</p>
<p>^True. 10 char</p>
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Not really. Those lucky enough to have traditional pensions aren’t “saving for retirement”–their employers are saving for them. So the only “unfairness” here is not with FAFSA, but with the fact that that some companies provide pensions and some don’t–some jobs are better than others. With a pension, it’s the company’s money being allocated for the employee, and the employee has no access to it (and no right to it until it vests). With a 401(k), it’s the employee’s money that he is choosing to put in the retirement account, and therefore it is reasonable for FAFSA to count it as income just like any other money that is earned and used by the employee for a specific purpose. (What I don’t know is whether a company match in a 401(k) that doesn’t vest until retirement is counted as income by FAFSA–it shouldn’t be, since it is more like a pension in that it is not the employee’s money and is not accessible.)</p>
<p>401k is a voluntary contribution. You pick the amount (up to a certain limit). The pensions you are talking about are likely public ones, right? Those are involuntary contributions. The employee has to contribute whether they want to or not and the %age of their income for the contribution is also set. They have no choice in terms of whether or not to contribute.</p>
<p>It’s difficut for anyone who has little or no savings, and whose obligations encroach or exceed income. Ironically, the spend thrift who blows his money of trips, vacations, parties, and shopping sprees is better off since he can just turn off the faucet of spending. If what you spend your money on are commitments that are not so easy to back out of, you are stuck. Can’t really borrow either if you don’t have the extra money to pay it back. </p>
<p>I have a freind who made out big time on the unfairness of the system Yes, it was unfair that her kids could not go to the private colleges that were their first choices because their NCP father refused to pay, refused to even provide financial infos. But once they got over that, they were able to go virtually for free on the tax payer’s dime as their mother had no income. Full Pell, full federal and state money, baby for two kids. And Dad did end up slipping them money to make their lives easier as well. He just refused to make any commitments. There are ways around the system for some people. </p>
<p>But yes, a kid whose parents are deemed able to pay but refuses is in worst shape in terms of choices than a kid whose parents are deemed unable to pay. The latter is eligible for financial aid wheras the former is not. </p>
<p>So that 401K contributions in a year are added back to total income even though the IRS allows you to exempt those contributions from income is unfair. but is only a tip of it. HSA contributions are also added back in whch particularly galls me. Those are for health issues, for crying out loud. But Then there are those who don’t even have that HSA option. But because taxes are lower for HSA , 401K contributors, it jacks up the EFC even more, since income taxes are subtracted form income. So it’s even worse than it looks from the onset. You have to add back 401K contributions, plus because you made them, you have less taxes to offset your income as well. </p>
<p>I can fill the page with the unfairnesses, by the way.</p>
<p>Thumper1, non-elective pension contributions are NOT reportable as FAFSA income. It is the “choice” element of 401(k) contributions that makes them included in income for FAFSA purposes. This is from last years’ New York Times series on financial aid:
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<p>I also don’t see the inherent unfairness in adding back HSA contributions–ordinary medical expenses aren’t taken out of income for FAFSA, so why should money that passes through an HSA be treated any differently? In both cases (the 401(k) and the HSA), you’re saying that the existence of particular federal tax exemption should control FAFSA treatment. These tax law provisions were adopted to encourage saving for retirement and to ease the burden of medical expenditures. They were never intended to impact federal financial aid, and they shouldn’t. I agree there’s lots of unfairness (and opportunities for hanky panky) in the FAFSA system, but I don’t see it in these provisions.</p>
<p>cptofthehouse, I have nothing to add but to agree 100%. We have been saving as much as possible for my two children who are 4 years apart, no college overlapping at all. We will be paying a lot for both of them. We are trying to make sure that they apply for merit based scholarships, though most top colleges have none. I totally agree it is unfair. However, I also feel blessed that we are in better situation than some other people who happen to be in tougher one.</p>
<p>I would like to add that the 401K/Traditional IRA contribution is added back as income only for the year it is contributed. Once it is in 401K account, it does not count as assets anymore. So it is still beneficial to contribute to 401K/IRA for future retirement.</p>
<p>Another better way is probably to contribute to Roth IRA, which is after tax. Money in Roth does not count as assets. So if you have to choose between 401K and Roth, Roth IRA is a better way to save for retirement. However, I understand some companies have matches for 401K. So the best way is to get the match and then contribute to Roth, if you can do so.</p>
<p>MommaJ…that is what I was saying. The involuntary contributions are NOT added back as income.</p>
<p>A Roth has much lower limits for annual contributions. It’s not the best way to save for retirement for many people. Also, many benefit from the pretax retirement accounts to reduce taxable income for the year. </p>
<p>A Roth is a great vehicle, but it’s not the complete answer for everyone.</p>
<p>Ha, ha, the Roth IRA contibutions could be a better deal. I don’t think it’s going to make a huge difference in financial aid; in fact, it’s almost certainly miniscule but if you contribute to a Roth IRA you don’t get a tax break for those contributions. So you pay more in taxes. So those taxes you pay are subtracted from your income for FAFSA purposes. When you contribute a qualified plan, you pay less in taxes, so you your income for FAFSA purposes is higher. </p>
<p>I am comparing the HSA to a health insurance plan. Those whose medical expenses are paid by a health insurance plan do not have to report that money as income for either IRS or FAFSA purposes Those whose plans don’t cover the expense but have to pay it out of the HSA or out of pocket, get no break for the money set outside in the HSA to pay those expenses. Catastrophic amounts can be treated in different ways under Professional Judgement by financial aid directors, but what it comes down to, is that if you kid breaks his nose, and your insurance pays for it, all well and good. If the deductible is high, so you have a HSA to cover it and it pays for the nose, that money is added back into FAFSA’s income category, and not only that you have less in taxes you pay, so that figure impacts your AGI for fin aid purposes. It’s not as though one funds a HSA for fun. It’s always because a family is pretty sure that there will be unreimbursed medical expenses in the picture… like paying the deductible.</p>
<p>I understand how it works, and can rationalize it, but really, to me it makes no sense in some regards, given that heavy medical needs is an issue that some consideration is given in the fin aid picture. Retirement? Perish the thought! But medical is an area of concern and consideration .</p>
<p>cptofthehouse, thank you for your insight and I learned a lot from your post. </p>
<p>In CSS, there is a question on how much medical cost is not covered by insurance, and paid out of pocket. Is this amount subtracted from income/assets in calculating EFC?</p>
<p>thumper1, totally agreed on Roth which has a low annual limit. I just feel that mid-income people are in disadvantage EFC calculation and squeezed badly.</p>
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<p>The Roth tax break comes when you take the money out, not when you put it in. Plus, the earnings grow tax free, which is not the case with a traditional IRA or a 401(k). A Roth IRA is likely a better deal if your income taxes will be higher in retirement than they are when you are making your contributions. So here’s hoping that you guess right about future government tax policy and your level of retirement income. Crystal ball, anyone?</p>