<p>We're just starting to look at the ins and outs of college costs now and have found out that we're solidly in the donut hole.
For years we've been putting a few hundred every month into 529s for D (14, 10th grade) and S (11, 7th grade). But looking further down the road, we're realizing that by the time S is a sophomore, H will be turning 60 and I'll be 59 1/2 and so will be eligible to withdraw $$ from IRAs without penalty. Would it make sense in terms of FAFSA to stop our deposits into S's 529 and put them into our IRAs instead? Or would this not make a difference at all?</p>
<p>One thing to consider is that (I am pretty sure) IRA withdrawals are considered income on the FAFSA. And income impacts your EFC much more than assets. So a plan that involves you withdrawing from an IRA during the FAFSA years is probably not the most optimal. But I’ll let others who are more knowledgeable chime in (and correct me if I’m wrong about the IRA withdrawals).</p>
<p>I agree with mathmomvt.</p>
<p>The money in the IRA would not be reported as an asset on FAFSA. But any withdrawals from the IRA would be income that would have to be reported on FAFSA.</p>
<p>529 accounts must be reported as assets on FAFSA. But withdrawals to pay for qualified education expenses do not have to be reported as income on FAFSA.</p>
<p>So the answer would be, it depends. The FAFSA EFC tends to be more driven by income than assets except where assets are high. The maximum amount of parent assets that will go to the FAFSA EFC is 5.6%. Unprotected assets also have a certain amount of protection depending on the number of parents and the age of the older parent. The maximum amount of income that goes to the EFC is 47%. So it would really depend on your individual financial situation - what the income will be, what assets will be etc.</p>
<p>Congrats on thinking ahead to fund your 529s. Your question is complex because there are state & federal tax implications on one side, and financial aid implications on the other.</p>
<p>As far as where to put the money in the first place, if your state allows tax credits or deductions on contributions to 529s, then you’d need to balance that against the (possible) tax deduction of a contribution to an IRA. In my state there are no credits/deductions for 529 contributions, and I don’t get an IRA deduction either so that’s a wash.</p>
<p>Either way, your money grows tax-free in both a 529 and an IRA.</p>
<p>As far as withdrawing the money, both 529s and pre-tax IRA contributions are withdrawn tax free, so that’s a wash too.</p>
<p>What’s not a wash is that your 529 withdrawal, when made for qualified higher education expenses, is not reported as income either on your taxes or on FAFSA. When funds are withdrawn from an IRA, this is a non-tax event that’s reported as income on FAFSA. So if you withdraw $20,000 from a 529, it’s not reported on FAFSA but if you withdraw the same amount from an IRA, it’s reported as income on FAFSA and increases your EFC by up to 47% if you’re at the top marginal “rate” for income.</p>
<p>(cross-posted with others)</p>
<p>Thanks everyone for the detailed answers! I’m trying to wrap my head around all the math here.</p>
<p>Does FAFSA need to be filled out with new data every year?</p>
<p>So it looks like the short answer to my question is that IRAs are probably not a good “FAFSA shelter” or place to “hide” savings that would impact on FAFSA.</p>
<p>We’re in New York and according to petersons.com list of State Tax Breaks for 529 Plan Contributions, Up to $5,000 for single filers / $10,000 for joint filers. We’re filing jointly.</p>
<p>So 529s are a good investment vehicle in FAFSA terms? I’ve heard of people putting $ in grandparent/relative accounts but I guess the tax impact would offset any gains here.</p>
<p>
yes</p>
<p>I’m not sure about the grandparent 529 thing but there is another thread here talking about that right now.</p>
<p>Grandparent owned 529s have pros and cons. The pro - currently they are not reported as assets on FAFSA at all. The con - expenses paid for the student from a grandparent owned 529 account must be reported as untaxed income to the student on FAFSA. A student currently has income protection of around $6,000, any income over that 50% goes to the EFC.</p>
<p>And yes, FAFSA must be resubmitted every year with up to date income/asset information.</p>
<p>The $10,000 deduction is only as valuable as your marginal tax rate. If you’re in a higher income tax bracket, then the deduction is worth more. You can do the math and see if there’s an advantage to you to get the deduction for the 529 or the IRA - it’s possibly going to be the same tax savings either way.</p>
<p>Step back a moment and look at the bigger picture. You must save for your retirement first. If that means you put more money into an IRA than a 529, so be it. Your children can go to colleges that cost less. Students can get scholarships, grants, loans, and jobs to pay for college. Retirees must have all their money ready when they retire.</p>
<p>I have pondered this same question of using IRA funds to help pay for college as my husband is turning 60 this year. Then I realized that any distribution would be counted against us for the following year’s fin aid calculation. So I decided to not go that route until the last year of our daughter’s college education (she’ll be a sophomore next year) when it won’t matter for the following year. Also, my d has some savings bonds that we are holding for her to cash out for her last year in college.</p>
<p>beolein, this doesn’t sound to me like a case of a family sabotaging their retirement savings for college. The OP was asking about putting the money they were already planning to save for college into their IRA instead (but still use it for college). It sounds like they are already being smart about both college and retirement savings.</p>
<p>Thanks mathmomvt, you have it right in your response to beolein–I’m talking about money that’s allocated towards college costs already. We also have funds allocated towards our IRAs. </p>
<p>D and S know that we’re frugal and live well within our means (we drive used cars, love finding bargains at thrift shops, look for budget ways to have fun) so that we can put away money for their college and our retirement. </p>
<p>D asked me today how much we would contribute towards her college education–she knows that H’s family didn’t give him anything except room and board while he was attending community college, that he had to work lots of part-time jobs and that he’s very grateful for Pell grants and NY state TAP grants. She wasn’t surprised to hear that we were not going to give her a full ride to the most expensive schools. Of course it would be wonderful if she got into Princeton (I ran the numbers and found that our EFC would not bankrupt us) or one of the Cornell colleges that have lower costs for NY residents, she’s an excellent student, but that would still be like winning the lottery, something that we can’t count on. I often find myself wishing that NY had a state school with a ranking like UNC or U of VA.</p>
<p>Do you run the risk of overfunding the IRA, if you are already making contributions and consider putting the extra for college there?</p>
<p>OP may not have sacrificed retirement savings for college savings, but IMHO, unless OP has a defined benefit plan (very uncommon these days outside of public sector workers), if they are not considering BOTH 401 and 529 I do not think they are adequately funding retirement. If they are independently wealthy, imho, they should be considering UGMA account for estate tax play.</p>
<p>UGMA accounts (other than 529 accounts) are reported as student assets on FAFSA. (not sure if the OP is hoping for FA, but thought I’d mention it just in case).</p>
<p>Sigh, Swimcats, I KNOW THAT. But for wealthy parents, it is a better estate tax play than 529 – which do NOT get estate tax exclusion. But back to OP, if they can not fund BOTH 401 and 529, I suspect they are shorting retirement, even if they do not know that. I would suggest fully fund 401, BEFORE any 529. Kids may have less $$$ available. Thats life.</p>
<p>No need to shout. I was posting the information for the OPs sake as she probably does not know it being new to the process. That is why I said "(not sure if the OP is hoping for FA, but thought I’d mention it just in case). "</p>
<p>Sorry, sWim cats.</p>
<p>But I really think any parent who has to choose between 401 and 529 should go with 401 – not becuase better for college funding, but becuase I really doubt that they have adequately funded their own retirement. If they were funding retirement adequately, they could and should fund both.</p>
<p>Good point.</p>