I wanted to check whether my reasoning is correct about a couple of scenarios and how they would affect Finaid. This mostly relates to CSS Profile.
I have an inherited IRA from which I have to take a required annual minimum distribution. I’ve already satisfied that for 2015.
But I can take more distributions.
Scenario one. My income is $100k. I take out $5k from the IRA. it’s treated as ordinary income so my income is $105k. But then I use it to pay $5k property taxes. So I deduct that on Schedule A from my now $105k income, which reduces it back to $100k. So it’s a wash in terms of income and what I present to Finaid via the profile.
Scenario two. My income is $100k. I borrow $5k from HELOC, and use that to pay $5k in property taxes. Net effect is to reduce my income to $95k for finaid purposes.
Using the HELOC will also raise my indebtedness and reduce my home equity value. Also good for Finaid.
The only possible negative re Finaid with using HELOC is the amount reported in retirement accounts is not reduced. But my understanding is that retirement amounts are weighed less than other assets–especially as we age.
How does borrowing from a HELOC reduce your income? It doesn’t. Your income would remain the same.
The difference is you would have less equity in your house so your home equity would be smaller.
But this is for Profile schools only…or schools that use their own form. For FAFSA, your primary residence isn’t even mentioned.
Also, before you do all of these financial gymnastics…remember that need based financial aid is largely based on income. Your home equity is an asset for Profile schools…not income. All of this might not matter at all in terms of need based aid.
I would suggest you NOT withdraw from your retirement account.
I didn’t say that taking money from HELOC reduces my income, but that if I use that distribution to make a property tax payment, that that payment would reduce my income.
I’m saying if I take $5k from HELOC and use that to make a property tax payment, that amount is deducted from income.
E.g., income is $100k-$5k property taxes=$95k income.
Versus taking from IRA:
$100k income+$5k IRA distribution=$105k income-$5k property taxes=$100k income.
Latchiver…you need to make the property tax payment regardless. I don’t see how this reduces your income…it certainly doesn’t reduce your AGI.
And all of this might not matter at all. Is your kiddo only applying to colleges that meet full need for all? If not, these financial aid gymnastics might not net you a dime more of need based aid.
I’m not sure having an income of $95,000 vs $100,000 a year would make a vast difference in your eligibility for need based aid…unless your kid got accepted to a school that has $100,000 as its threshold,for very generous need based aid awards (Stanford, for example)
True, making a property tax payment will not reduce AGI, only taxable income.
However, if I use HELOC money it’s not part of AGI, while an IRA distribution would be.
I went to my child’s Finaid calculator, which has been very accurate. They ask for both wages and other income such as IRA distributions. And the hypothetical aid is calculated using both types of income.
The numbers I used, $5k property tax and $100k income are examples. My property tax is significantly higher.
I guess the bottom line is that an IRA distribution is entered as income on a Finaid form and a HELOC loan isn’t.
HELOC has advantage over IRA distribution. It does not reduce income but it helps CSS profile on the question regarding debt.
But I am reluctant to have a lien on my house at the near retirement age. Too much hassle. I would try to tighten my belt for property tax. Does your kid have college loan?
Kid will have Stafford but no other loans. We operate on the principle that it’s ok to graduate with a loan the size of a car, but not the size of a house. I have a tremendous amount of equity in my house, and the HELOC is only a fraction of our total equity.
It seems like HELOC is the way to go, since an IRA distribution adds to income, but a HELOC loan doesn’t–plus it increases our indebtedness and reduces our home equity. It’s an inherited IRA so I have no choice about a minimum distribution, but that amount is less than my property tax obligation.
When I raised this question, I forgot that Finaid is not calculated on taxable income so reducing that is irrelevant. But it’s not just calculated on wages. It’s all earnings. Wages plus stuff like IRA distributions.
You can pay for the last year of school with IRA distribution.
You may also have an option to borrow from your own retirement plan and use this IRA as a backup in case you lose your job. But HELOC is still more advantageous as it decreases your equity and they may give you some break for mortgage payments.
@coolweather In the best of all possible worlds, I’d just reach for my checkbook. But I don’t think circa $25k is an undue burden–especially if there are family resources that could pay them off in an emergency. Plus responsible repayment boosts credit ratings.
If those are your two choices, the HELOC approach is more desirable from a FA maximization standpoint: it does not increase your income, and, for schools that use Profile, it reduces your home equity as an asset.