<p>I believe IRA/401K contribution for a particular year gets added to to your income. That means pretax 401K contribution(usually through payroll) will be added back to your income. You can also invest upto 11,000 per family per year in IRA rollover which are from usually from your past savings. Does this also then get added to your income? If yes, does it mean your EFC will be higher had you not invested in rollover IRA. This 11K will be off limit from next year onwards for next few years till you graduate. </p>
<p>Let me give you an example</p>
<p>Let's say your income is 70K + 17.5K(401K) + 11K(IRA) = 98.5K as opposed to 87.5K if you had not invested in IRA. </p>
<p>Your assets may be higher by 11K if you did not invest in IRA. </p>
<p>My question is which way your EFC is going to be lower? I think the curve is harsh on income side as opposed to assets side, I don't know the curve, I know your assets are taken 5.4% towards EFC. </p>
<p>Can knowledgeable folks chime in?</p>
<p>First, there are different kinds of IRAs: traditional, Roth and Rollover, each of which means different things.</p>
<p>Traditional IRA is contributed pre-tax, up to $11,000 per couple. Traditional IRA will lower your tax on the year you make the contribution, however, it will be added back to EFC as untaxed-income.</p>
<p>Roth IRA is contributed post-tax, up to $11,000 per couple. Roth IRA will not lower your tax on year you make the contribution, it won’t be added back, because it is already included in your income. </p>
<p>Rollover IRA is for rolling-over from employer based retirement accounts, such as 401K, Simple IRA to an individual account. There is no tax consequence, and you do not need to add it back because you have not earned the money in that year. (Roth conversion is another story, let’s not discuss it here).</p>
<p>Your example assumes a contribution to a traditional IRA, your tax is lowered by 11k * your tax rate.</p>
<p>If you contribute to a roth, you income will be the same. however, your tax for the year will be higher, which will be subtracted in EFC calculation.</p>
<p>Like I suggested before, buy a tax software and put your numbers in, then manually calculate EFC on paper using the form of EFC. You will see exactly which way is better for you. Nobody will be able to give you a definitive answer because there are so many variables.</p>
<p>“Let’s say your income is 70K + 17.5K(401K) + 11K(IRA) = 98.5K as opposed to 87.5K if you had not invested in IRA.”</p>
<p>You implied that your income is lowered by 11k if you don’t invest in IRA, that is mostly not the case, because your family’s 2013 income is already set in stone. Whether you contribute to traditional IRA or Roth IRA does not change your income in terms of EFC calculation, it may change the tax you pay for year 2013, which then will affect your EFC too.</p>
<p>I’m a bit confused by the way your post is worded. Putting money into a Roth would not increase (or decrease) your income for FAFSA. Or are you talking about rolling money from a regular IRA into a Roth? That would increase income. In the past, schools could make a professional judgement adjustment when money was rolled from a regular IRA to a Roth so it would not increase the income used in the EFC formula. Not sure it that is still the case or if it was just during the years there was a special tax break for rolling into a Roth.</p>
<p>I guess my larger question is if you invest in traditional IRA (outside of payroll) from your past savings, your AGI is reduced by $11K and hence Taxes; the problem is this amount is added back to your wages so your income is higher. </p>
<p>The flip side of this is if you let this money sit in a bank, it will get added to your assets every year and you will pay 5.4% of your assets towards EFC for 4 yrs. So which one is better? I don’t know. </p>
<p>I think higher percentage of income is counted towards EFC than assets.</p>
<p>If you put the money in a traditional IRA your tax bill would be lower. Taxes are an allowance against income in the EFC formula so the EFC would be slightly higher because of this. The money being in an IRA rather than an unprotected savings account would cause the money to be not counted as an asset.</p>
<p>Hard to say how this would affect you as there are so many variables. </p>
<p>For instance, take someone in a 25% tax bracket (and assuming full eligibility for deductions etc). The Fed tax savings by putting $11k in an IRA would be $2750. That $2750 would mean a smaller tax allowance in the EFC formula. The max % of income (once it goes over certain levels) that can go to the EFC is 47%. So the EFC might go up by 1293. The max % assets can go to the EFC is 5.6%,so protecting the assets mat cause the EFC to drop by 616. So a net impact on EFC of 1293-616= 677. Maybe. And you saved $2750 in taxes. The following 3 years, there would be no income impact on the EFC from that contribution. The $11k would still be protected so would still lower the EFC. So you woul have one year whee the EFC went up by 677, 3 years where it went down by 616, and you saved $2750 in taxes. So, assuming you get full need met without loans, you might be better off over 4 years by 2750-677+616+616+616=3921.</p>
<p>BUT, if income is not in the higher end, the % will be less than 47%. If you are below the 47% rate in the EFC formula, the % of the assets that goes to the EFC will be lower. If your unprotected assets are below the asset protection limits, the asset may not impact your EFC at all. Your tax rates will cause all these numbers to change. You may not be eligible for FA, especially if it is not a meets full need school. You might also save some State taxes. So many variables.</p>
<p>The flip side of this is if you let this money sit in a bank, it will get added to your assets every year and you will pay 5.4% of your assets towards EFC for 4 yrs. So which one is better? I don’t know. <<</p>
<p>Even if it is wash the year you put the money into the IRA, after that year it is in a retirement account so out of play.</p>
<p>If the total assets are over the asset protection allowance, then up to 5.6% of excess assets will go to the EFC if the parents income level puts them at the 47% of income going to the EFC level. (it’s a weird thing in the formula - the 5.6% figure comes from 12% of assets getting added to available income and 47% of available income going to the EFC). If the income level is lower, the asset % will be lower. And if assets are below the cut off they will have no impact.</p>
<p>There is really no one right answer. It will depend on the individual. And a lot will depend on what sort of aid a school offers.</p>