<p>Both D's in LACs. Our EFC is about 34K total. Retirement is about 10-11 years away. We're thinking of maxing our 401k's to 20k each, total 40k, up from 7k total. How will this effect EFC?</p>
<p>I will qualify what I am about to say with, "I am no tax expert nor a college financial expert." However, I believe any pretax dollars that are put into 401s are seen as income and will count toward EFC. However, the money actually in the 401s is not counted against you as an asset. Hope I'm giving you good info.</p>
<p>Isn't there a dollar limit for annual contributions to a 401K ?</p>
<p>How the heck can you afford to contribute $40K to your 401's if your EFC is only 34K total? :eek: That's just bizarre. If I was coughing up 34K for tuition there wouldn't be anything left to contribute. Maybe your EFC should be higher LOL :)</p>
<p>401k contribuion limit for 06 is $15k + $5k "catch up" if you are over 50... so there ya go. anxmom, good question!!</p>
<p>Get that money in that 401k because once your kids in school the "institution" expects you to stop contributing while you fund his/her incredibly, and ridiculously, overinflated education costs. Once it's there they ignore it, supposedly.</p>
<p>lukester is correct. Funds put into a 401(k) are added back to income for that year. But, once the funds are in the 401(k), that asset is not counted for efc calculations.</p>
<p>We are hoping that we will be able to continue to contribute the max to our 401K's next year with two in college. But the reality is that for that one overlap year, we may not have the cash to do so. We are already contributing a large amount. The OP is saying they will increase from $14K total to $40K total. We would NOT be able to increase our retirement contributions by almost the COST of sending one of our kids to college. We just do not have that kind of cash flow. To be honest, it will have no affect on EFC. Money contributed to retirement accounts is considered income for that year. In other words, money contributed in 2005 is considered INCOME on the FAFSA form. Accumulated monies are not considered as savings or assets, except by some colleges who use the Profile. Value of retirement accounts IS a supplemental question asked by some schools when filing the Profile.</p>
<p>
[quote]
Money contributed to retirement accounts is considered income for that year. In other words, money contributed in 2005 is considered INCOME on the FAFSA form.
[/quote]
Money the INDIVIDUAL contributes to retirement accounts is income. Money a COMPANY puts in is not.</p>
<p>So, money set aside by a company for a defined benefit retirement plan is not counted. Nor is a company match.</p>
<p>But, money set aside by an individual IS counted.</p>
<p>If you see a double standard here, don't complain to me. Talk to your congressperson.</p>
<p>right all this is good info
money that you put in your retirement account- will be assumed to have also been available for tuition
Money your company puts in your account was never available for tuition so it doesn't even come up
Money that was already in the retirement account- is not counted as available assets.</p>
<p>I don't give financial advice, so please don't consider this as such. But if you are currently contributing to a 401k, and you have a company match for part of the contribution, if you have a cashflow problem when the tuition bills start to roll in, rather than adjust your 401k contribution downward it might make sense to maintain your contribution level but borrow as needed from your 401k. Most 401ks allow you to borrow (essentially from yourself) at very reasonable rates. Your 401k contribution may get added back to income for financial aid purposes, but it will still reduce your taxable income.</p>
<p>Hey anxiousmom, I never said I could afford it.</p>
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<blockquote> <p>We're thinking of maxing our 401k's to 20k each>></p> </blockquote>
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<p>You didn't say you could afford it, but you did say you were thinking about it. If you can't afford to do this, why would you even be considering it? From what you posted, I think you thought there might be a finaid advantage to this. There isn't. Is that what you meant?</p>
<p>I think it's funny that money put into a 401k is considered "income" during the year of contribution. </p>
<p>After all, we've been told (over and over again) that no one should consider Social Security as being a person's retirement (it's supposed to be just "supplemental") so people are expected to build a retirement elsewhere. </p>
<p>Yet the FAFSA system expects people to stop contributing to a 401K retirement account while kids are in college. If a person has 2 or more kids, that can mean not contributing for 8 - 12+ years (which is about 25% of a person's work career). That is crazy.</p>
<p>Nothing should be done to discourage people from contributing to 401k accounts. The whole country benefits from them in direct and indirect ways. The funds are invested in a variety of ways which create jobs for the country.</p>
<p>After all, we've been told (over and over again) that no one should consider Social Security as being a person's retirement (it's supposed to be just "supplemental") so people are expected to build a retirement elsewhere.</p>
<p>wel considering the way the governtment"works" it isn't surprising there are contradictions.</p>
<p>we kept putting the same that we have been however- a little more actually since it is closer to retirement all the time-</p>
<p><<i think="" you="" thought="" there="" might="" be="" a="" finaid="" advantage="" to="" this.="" isn't.="" is="" that="" what="" meant?="">>
Thanks to Thumper1 and everyone. I was looking for a finaid advantage, and I guess it's not there for income, only assets.</i></p><i think="" you="" thought="" there="" might="" be="" a="" finaid="" advantage="" to="" this.="" isn't.="" is="" that="" what="" meant?="">
</i>
<p>twr,
if your d's LAC's use CSS Profile, putting your $'s into 401k rather than home equity might be advantageous - but you would need to look at it from all angles. For us, continuing our 401k contribution while using our home equity line to finance some of the tuition cost seemed to be the better decision - but only marginally better and all families are different.</p>
<p>Paradoxically, 401(k) contribution can actually increase the efc in the year of the contribution since it lowers federal income taxes in that year (efc is net of federal taxes due). However, if the funds are 'surplus, it is more favorable to place them in a tax sheltered account retirement that just putting in the bank where they become an asset for year 2.</p>
<p>When EFC is figured, do they take into account how much FICA is paid? </p>
<p>Bluebayou: </p>
<p>I don't know what "efc is net of federal taxes due" means. Does it mean that EFC is based on a percentage on after tax income?</p>
<p>Yes, fafsa calculates what you and family have to live on and make tuition payments is net of federal income taxes due (not withheld). </p>
<p>yes, fafsa automatically considers FICA, based on gross income. It also considers state income taxes based on some (mysterious) formula. </p>
<p>Net: AGI less federal taxes less income protection allowance less an employment allowance = $$ available for education.</p>
<p>below is a link for Needs Methodology for both fafsa and IM. Ignore the first 48 pages of pablum...the good stuff starts on p. 49.</p>