<p>My family has undergone some strange financial circumstances over the past year that don't translate very well (or at all) onto the FAFSA, and I was wondering if I could get some advice on what I should do.</p>
<p>My mother was forced to cash out her 401(k) during 2009; therefore, our "total income" from our W2 is projected as a much higher number than our ACTUAL income. Later in the application, the form asks how much my mother and father have made from WORK. These numbers obviously do not add up to the large number mentioned earlier, so it seems as though FAFSA didn't accept the quantity entered in one of the blanks (The number representing my mother's income turned into 9999999.00 or something like that). </p>
<p>I just corrected that error by changing the 9999etc. back to the original number, and after submitting it, I saw that our EFC is now DOUBLE that of what it was before. What could have possibly happened? Our EFC was already high to begin with, but now doubling on us for apparently no reason at all?</p>
<p>There are no forms provided for other sources of income (such as 401(k)) to my knowledge.</p>
<p>Can someone please provide suggestions as to what I can do?</p>
<p>The income from work does not have to match the total income. All income from work is used for is to calculate allowances for FICA. If it was the income from work figure that was changed by a lot then yes it will affect the EFC. The higher the income from work the greater the FICA allowance (an allowance that reduces the income used in the EFC formula).</p>
<p>The form changed was “total income earned from work.” Yes, the number was 9999etc, but I changed that number back to the original amount and submitted my form. Even though I actually LOWERED the amount on the form, the EFC doubled.</p>
<p>Yes, as explained above, that *would *increase the EFC.</p>
<p>The main number used for calculating the EFC is the AGI. There are certain allowances against the AGI that reduce it, so reduce the amount of money used in the EFC formula. One of the allowances is for FICA (a compulsory “tax” you pay on earned income). The FICA allowance is calculated based on the earned income you reported in FAFSA (that is what that number is reported for).</p>
<p>For example. Say your AGI is $100,000. If entire AGI is from income from work then $100,000 is used to calculate the allowance for FICA. The rate for FICA is 7.65%. So the allowance for FICA would be $7,650. That allowance would be deducted from the AGI reducing the income used in the EFC formula to $92,350 (before any other allowances).</p>
<p>If only $20,000 of the AGI was income earned from work then the allowance for FICA would be 20,000 * 7.65%, which is $1530. So the AGI would be reduced by only 1530 leaving $98,470 income to be used in the EFC formula.</p>
<p>Higher earned income = higher FICA allowance which reduces the AGI making the EFC lower.</p>
<p>Lower earned income = lower FICA allowance which reduces the AGI by a smaller amount, making the EFC higher.</p>
<p>You say your mom was forced to cash out her 401K. If there was some extenuating circumstance for this (like she needed the money to pay medical bills or something of that sort), you would be able to request a special circumstances CONSIDERATION at you college(s). </p>
<p>But…if she changed jobs and cashed out instead of rolling over into another retirement account, that was HER decision and was not forced. When folks change jobs, they sometimes choose not to leave their retirement monies with the former employer. Most folks roll these retirement monies into OTHER TSA or IRA types of accounts…they do not cash them out.</p>
<p>Your mom’s 401K withdrawal would be taxable for last year if she withdrew it because when she put the money INTO that account it was done without taxes being paid AND her taxable income for those years was reduced.</p>
<p>Simply put…that 401K money WAS income for her if she withdrew it.</p>
<p>Did it all get spent? Only 5.6% or so of parent assets are tapped as part of your EFC.</p>
<p>The 401k withdrawal is put in as income on the 1040 form on line 16b. It is not put in as wages, salaries, tips, etc. and there will be no W-2 for it. It is reported on a 1099. It will be counted as AGI, however.</p>
<p>It would be nice if the penalty paid could be put on the FAFSA some place, but there is no place for it. It is considered an “additional tax” and there is no spot for it.</p>
<p>If one changes jobs, there is always the option of rolling over a 401K. If she was “forced” to cash it in to use due to a loss of other income, then it was used as “income” and will be counted as income. </p>
<p>No one is actually forced to cash in a retirement account. It can be rolled over directly. When folks choose to cash it in to deal with money problems, they have to understand the consequences.</p>
<p>If there were medical bills, bills due to caring for parents or family medical or other issues, a school may take this into account.</p>
<p>^^sunny, some companies have a minimum requirement that an employee must have in the 401K to stay in that 401K if you leave the company. So yes, there are situations where you can be “forced out” of your 401K plan, but ideally people roll those monies over within the time allowed to not trigger an income situation.</p>
<p>Getoutofmyyard, did she cash in the money because she lost her job and needed it to pay bills? Or did she cash it in to pay off unusually high medical bills? If it was one of these situations, you may request a special circumstances review from the college(s). It may be possible to adjust the elements that go into the EFC formula depending on the situation. There are no guarantees of any adjustments, but it is always worth requesting a review of your individual situation. I work in an area with very high unemployment, so we run into a lot of 401K cash outs that were done just to pay bills. If we are able to adjust, it doesn’t necessarily result in increased aid (especially if the EFC still remains high enough that only loans would be awarded), but it is worth investigating. We require documentation of the entire situation, so be ready to provide everything necessary to verify the source of the income, the reason for the expenditures, and receipts for those expenses.</p>
<p>If the cash out was done due to change in employment, as mentioned already … no adjustments will be made, in all likelihood, since it is definitely income if not rolled over into a qualified retirement account. Adjustments are only made if there is some underlying situation that might justify making them.</p>
<p>kelsmom - do you request a special circumstances review before the aid package is done so they have it the first time around, or do you wait to see what the package is and then appeal it asking for a special circumstances review? </p>
<p>I would argue that if the 401k was cashed out because of loss of income, then the penalty that is paid should be taken into account when looking at the AGI.</p>
<p>Wouldn’t the penalty paid be reported in with income tax paid? That is already taken into account by FAFSA (income tax is used to reduce the AGI in the EFC formula).</p>
<p>No, the penalty is not considered income tax paid. On the 1040, the penalty is considered “other taxes” in the same section as the self employment tax and there is no place in the FAFSA form asking for that.</p>
<p>cartera, every school is different. For example, our priority deadline has passed, but our special circumstances review form is not yet ready. So for us, the student would have an aid package prior to a special circumstances review being performed. We would adjust the aid package later if necessary. Other schools have their own policies, though … so check with each school.</p>
<p>getoutofmyyard – I think you don’t have many options here. You need to go to your mother and explain that her cashing in her 401(k) has resulted in a shocking new EFC. She may well not have realized this would happen, but it did and now you’re stuck with the result. I know she didn’t have a choice in cashing out her 401(k).</p>
<p>Then if you have extenuating circumstances in your family you need to bring that to the attention of the financial aid office at the school you want to attend, as other posters pointed out. But there is nothing you can do about your EFC, you’re stuck with it.</p>
<p>At my school, the student could submit a special circumstances appeal. Our 1011 forms become available in April, but our priority FAFSA date is 3/31. When the school approves a special circumstance, the EFC is changed (by the school). Just be careful to complete the FAFSA accurately.</p>