<p>
[quote]
Financial advisers caution parents to resist pumping money into college savings before securing their retirements.</p>
<p>"Think about yourself first," said Mary Staton, Charlotte, N.C.-based co-author with her husband, Bill, of Worry-Free Family Finances: Three Steps to Building & Maintaining Your Family's Financial Well-Being.
[/quote]
</p>
<p>Today's parents are facing a different retirement situation than older generations. Current retirees generally take out much more from Social Security than they paid in, and most who had full-time employment also qualified for defined benefit retirement plans. Tomorrow's retirees will be far more dependent on their own resources accumulated in 401K plans, IRAs, etc. That isn't all bad, IF they start saving early and don't tap those savings along the way to retirement.</p>
<p>Then what to do for college when the Institutional Method considers the retirement savings as "available" to pay for college? Methinks that the financial advisors don't talk to the financial aid folks.</p>
<blockquote>
<p>what to do for college when the Institutional Method considers the retirement savings as "available" to pay for college?</p>
</blockquote>
<br>
<p>That's a good question, and one that colleges will have to address. Some people still have significant defined benefit pension plans (many teachers, unionized workers, etc.), and may also have post-retirement medical coverage; they aren't "taxed" by the colleges on the value of those plans. If the rest of the population has to amass seven figure sums to achieve similar post-retirement income and health care levels, it hardly seems fair to penalize such savings. Perhaps one approach would be to consider only "excess" retirement plan assets, i.e. use a formula based on current salary to project "normal" assets, and consider the balance as "available". The FAFSA does something like this for overall parental assets by using an age-based exclusion.</p>
<p>Before everyone panics, retirement funds such as 401k, 301b, and IRA accounts are excluded from consideration under both methodologies. Other retirement savings vehicles are considered in IM, but the amount considered "available" to pay for college is never more than 5%.
Some financial aid offices also use professional judgement to make adjustments, depending on the family's individual circumstances.</p>
<p>PS Just wanted to add that colleges frown on people pulling money from other assets and putting them into 401Ks, etc. prematurely to "hide" them from EFC calculations so no one should rush to move funds around. But, the money you already have invested in these retirement savings vehicles will be excluded under IM. What will NOT be excluded are savings/assets you've set aside in other accounts earmarked for retirement. Chevda is correct in saying those accounts will be considered "available" but, again, no more than 5% will be considered "available."</p>
<p>It is my understanding that student IRAs must be reported on the CSS Profile and are counted at the higher student rate. However, I could be mistaken so I'd advise asking a FA officer at the schools your son is applying to for clarification.</p>
<p>Thanks for the clarification, Carolyn. This is a tricky area - a small business owner could stuff fairly large sums into such accounts, but it's hard to fault individuals for saving for retirement.</p>
<p>Even though only a percentage of parent financial assets are considered "available", they can still give a healthy boost to the EFC.</p>
<p>Correct me please, and I may not state this using the proper terms, but money that is already in the 401ks & IRAs is not considered as available, but the money added to the accounts in the current tax year for FAFSA is considered as available. So for the FAFSA filled out early in 2006 using the tax returns for 2005, any money set aside for retirement in 2005 is factored into the EFC.</p>
<p>Not quite -- the money is simply added back to income, not considered as an asset. In other words if I earn $50K and put $5K of that into a 401K, then I can write that off and my AGI is $45K. FAFSA adds that back in, so income is once again $50K. </p>
<p>But the money is not added to assets, so it will be only counted once.</p>
<p>There are plenty of families in the Third World that think that investing in their children's education IS their retirement plan, and that may be the most rational retirement plan for some families.</p>
<p>My initial thought was the same as Chedva's. If my retirement savings are not considered available, why do colleges ask for that information? (voluntary payments to pension or savings plans paid directly or withheld from earnings, IRA deductions to self-employed plans, etc) If it is not considered "available" then they shouldn't need to know.</p>
<p>Most colleges do not ask -- I have never had to provide that information. (Its one of those optional questions that sometimes gets tacked on to the end of the CSS Profile). Of course, the previous year's contribution to an IRA or 401K will show up on the tax return as an adjustment to income. (I'd note that this is one advantage of a Roth IRA -- since you don't deduct it, you can continue to fund a Roth IRA through the college years without having any evidence show up on tax returns).</p>
<p>The PAYMENTS are considered part of income as Carolyn clarified. They ask for those amounts because they are deducted from your income for tax purposes, and some forms show your income net of those payments. The amounts accumulated are NOT counted as assets like the rest of your savings and investments are. </p>
<p>I want to add that BC has started asking about qualified retirement assets, and ARE including them in assets if they are above a certain amount, and I have heard that the college savings plans are under scrutiny for inclusion. But for right now, most schools do not consider those assets.</p>
<p>"Financial advisers caution parents to resist pumping money into college savings before securing their retirements."</p>
<p>Shouldn't be much of a problem. </p>
<p>I know many people who forcefully resist pumping money into college savings before securing their new cars, cell phones, big-screen TVs, golf trips, and twice-weekly restaurant visits.</p>
<p>Our family did both-saved a tidy sum for college and retirement. We closed on a "new" house a few months before our son was born. While the figures are fuzzy, we invested $7500 of the capital gain from our first house into his college fund and my mom gifted him $5,000 at the same time.</p>
<p>We never had to save another cent toward college, Uncle Sam gave us a tax deduction on the additional mortgage interest $7500, invested the $12,500 reasonable well and ended up with a college fund of about $78,000 when he graduated HS.</p>
<p>And because we did not have to save any more for his college after he was born, we were able to concentrate on retirement savings instead.</p>
<p>Did this stratege impact our EFC? It certainly did but we could not have cared less because both our retirement and our son's college costs were secure.</p>
<p>My thoughts on some of the issues regarding retirement accounts, retirement savings and pensions...</p>
<p>It is interesting that retirement account balances are considered protected because they are considered a higher priority than education, yet reasonable contributions to those accounts might not be (specifically the Roth IRA/401k or (more concerning) if what carolyn is reporting "all" contributions are added back in).</p>
<p>In the college board document, they seem to be all over the place on how to best determine ability to pay depending upon which model to use, etc. I think what they fail to see is that the cloudiness that prevails in various schools use of different formulas is that besides the game playing that some people participate in, there are a large number (myself included) who end up paralyzed by whole prospect and as a result make very poor choices as to asset allocation (retirement vs liquid cash vs home equity vs debt vs etc).</p>
<p>My AGI is barely under one of the threshholds used by the FM to include assets in calculating EFC. But if you consider my pre-tax retirement contributions I might be over, then my home equity and cash cushion comes into play possibly. But the IM method doesn't have that exemption (I think) and different schools use different methods, so I don't know what to expect (except that it my EFC will be enourmous LOL). Yes I work at a place with a defined benefit pension, but I will barely be vested when my kids are in school and the value of that is uncertain given layoffs early in a pension make them almost worthless and with the number of traditional pensions going under, I figure that I have to save for myself.</p>
<p>The more that these guys manipulate the system to try to make it "fair", the more suspicious that more of us get. It is bad enough to have to file taxes once a year and try to work that to our advantage. The second filing for FAFSA will be just plain torture.</p>
<p>One more thing I've learned... I'm gonna have my DW quit her second job because the tax rates (FICA + FED + FAFSA) don't make it worh her time. Quite frankly, if she used to time she spends at the 2nd job to find ways to cut our expenses, we'd come out ahead financially. Talking about a backwards way of doing things.</p>