My husband and I have both retired. My husband draws small pension. We are liquidating non-IRA assets held in mutual funds to meet both our annual expenses and our son’s college tuition. The mutual funds are counted as assets available to pay tuition and typically CSS Profile assess out-of-IRA assets at 5% per year for tuition. That is fine by us.
We have long-held mutual funds and so the capital has accrued a lot of gain. When we sell the mutual funds to pay for tuition and expenses, we incur taxable capital gains. That is also fine by us.
Our problem is that the college seems unable to differentiate between capital gains distributions, which is income, and taxable capital gains which are a part of assets being liquidated, and which is not income.
The college is counting the capital gains that is subject to federal and state tax as additional income and responds by saying - you may not see it as income, but we do. That is ridiculous.
Say the CSS profile says we could pay 10K annually from our assets (5% of assets). If we withdrew 10K from FDs or from our savings account, the college would not count it as additional income. But if we cash 10K from mutual funds of which 5K is gain, why should the college count the 5K as additional income? I fully see why the IRS wants to tax the 5K in gain, and, as I said, that is fine. But all the college should care about is that we should pay 10K from our assets.
I’ve tried saying this in multiple ways and have had no luck getting this point across to the Financial Aid office. Can someone help?
Please only respond if you get my question and have some financial expertise. I’m not looking for vague responses. We have an income of X and assets of Y. Both are used to determine our EFC. Y may be in shares. Y may be in my savings account. Y may be in an FD or in my house. It is still Y. A portion of Y does not change into X just because I sell shares.
I don’t think you’re going to be able to convince anyone that realized capital gains don’t count as income. Your best bet from a FA perspective would have been to convert those equities to a money market fund prior to the base year for FA. The best you can do now is delay realizing those gains to the extent possible. In some cases, loans might make sense until soph. Spring. But you’ll need to do the math and keep the big picture—taxes, not just a FA—in mind. If you want to look on the bright side: at least you have capital gains and not losses.
@oorhai I was typing during your second post. Adding to my post above…I understand your frustration. But you’re misrepresenting the way things work. You have unrealized gains in your mutual funds. When you realize those gains by selling shares, it is viewed as income (by everyone, not just FA offices). In fact, it was income before you realized the gains by selling, it’s just that the IRS and FA offices only recognize the gain when shares are sold. The FA offices could just as easily treat the unrealized gains as income available for college but they don’t.
Some schools will tap into your Y whatever, where did you get that 5% figure for assets via CSS? You think this is an across the board figure, not school dependent?
That’s what I recall. Some part of your non-IRA savings is protected and the part depends on your age. The remaining is subject to a 5% usage per year.
I totally “get” your question…and flagged a poster who might have good info to give you specifically.
I stand by my comment…there are plenty of things the IRS doesn’t view as “income” (e.g. some deductions taken by business owners) but the financial aid offices DO consider these as a source of income.
The others who have responded were clear. Hoping @BelknapPoint and maybe @Madison85 respond.
ETA…I see you said OUT of IRA assets are being tapped at about 5%. Profile schools can actually tap any %age they choose. The 5.6% asset tap is for FAFSA calculations. There is an asset protection allowance that has gotten smaller and smaller. I think it might be less than $30,000 a year now. After that, all of your assets are assessed for FAFSA purposes. There is NO asset protection allowance uniformly used by Profile Schools.
The work around is to take a second mortgage or move mutual funds into a brokerage account and take loans against the mutual fund balance. Loan proceeds are neither taxable income nor capital gains.
Then clear the loan balances after fin aid is no longer an issue.
I think this kid is late in his college career, it looks like this would be a jr and the school has all the history (no FA) thus far. It seems OP has tried before to get FA to negotiate. I think financial gymnastics should be approached with caution. So is the question is, does Oberlin cap non retirement assets at 5%?