Deferring Income -- What does this mean?

<p>I read this from Ask the Dean on CC.</p>

<p>"Speaking of 401k plans, our expert also said that the accumulated assets in your 401k won't be considered when aid decisions are calculated; however, once your child is in college, then the amount of income you defer each year will be counted as untaxed income, which will definitely affect aid awards. "</p>

<p>What does this mean when you defer income?</p>

<p>The way 401K plans work is that the balance in the plan is not included as an asset when the financial aid forms are completed. But when your parents make contributions to the plan which are tax deductible, they have to add that amount back to their income even though they do not have to pay taxes on that amount. In other words the income figure that they want for financial aid purposes has to have the amount of the 401k contribututions for the year in it which is different than the figure your parents use to to get their tax liability.</p>

<p>Ah, I see now. Thanks jamimom!</p>