I know that for education expenses and for people of a certain age, Roth IRA distributions, which are from already taxed money are not taxable again up to the amount of the contribution, with earnings based on that comtributon being taxable income.
But what about for finaid calculations, particularly to a Profile school? Is a Roth distribution considered income?Researched this but haven’t found a definitive answer yet. I found that Traditional IRA distributions which were based on non-taxed contributions are obviously income for both the IRS and finaid formulas. But it would seem that for a Roth distribution to be considered income that would be unfairly counting it twice. I’ll keep looking, but anyone know the answer?
Yes, it is. Doesn’t seem fair, but it is. The Roth assets are not counted, so a distribution from them is considered income.
Keep in mind in your research that the goal of finaid formulas is to determine the income available to a family to pay for a student’s education themselves. It isn’t really relevant to that goal whether the sources of available income were previously taxed or not.
Not sure if this is definitive or not, but a NY Times financial aid question and answer column fro April of 2014 indicates that “A Roth I.R.A. is not reported as an asset on the Fafsa. But distributions from a Roth I.R.A., including a tax-free return of contributions, are reported as income.” See http://www.nytimes.com/2014/04/13/education/edlife/ask-your-questions-about-financial-aid.html?_r=0. I assume that the profile treats this the same way.
The double counting issue you raised exists for any voluntary retirement plan contributions, as for traditional plans they are added back to the income reported. So if you made contributions in one year, the contribution is counted as income in that year, and if you take a distribution in the next year the distribution is counted as income in for that year as well. Whether it is fair or not, Roth and traditional retirement plans are essentially treated the same in regards to how they are reported.
There have been other discussions that debate whether this is fair or not, but financial aid rules and tax rules differ on many fronts. I think the basic idea is that the schools consider all disposable income when making their financial aid decisions. Their money, so they get to make the rules.
I guess I was too lazy to look at this from the CSS Profile: “Enter the untaxed portions of IRA distributions…” (PI-187c)