I filled out the FAFSA in November but then I made a correction to it because I forgot to include our contribution to a
tax deferred pension plan. This correction caused our EFC jump by almost $4,000. I thought that pension/retirement accounts do not impact financial aid but obviously they do! Can anyone out there speak to this?
The amount you contributed to your tax deferred retirement account in 2015 was added back in as income. That is what is done.
The balance IN your tax deferred retirement account is not counted as an asset.
Hi Thumper1- thank you for your explanation. I am new to the financial aid process and it just seems so hard to catch a break.
Well…this one is actually easy. While those contributions are tax deferred for income purposes…they ARE income for the year…and that is why they are added back in as income.
Do colleges take this information into account when determining one’s financial aid package? Is tax deferred income considered the same as regular income?
Yes…that tax deferred contribution to your retirement account is added back in as income.
You chose to contribute to a retirement account. The school won’t subsidize that choice.
Correct. They don’t expect you to dip into your current retirement assets to pay for college. That’s protected. But, as stated above, your contribution in the current year is part of your income – it does not reduce your income. You are expected to stop contributing to your retirement fund during the years your children are in college and instead redirect those funds to pay for college.
They now expect you to stop contributing to your retirement account 2 years before your child goes to college.
Stupid.
No one “expects” you to stop contributing to your retirement accounts. The money IN those accounts is NOT counted as an asset…which is a plus.
But the money you contributed to that account WAS income for the tax year used by the fafsa. It was pretax for INCOME TAX purposes…but still was income. And it is considered income for fafsa purposes.
@BelknapPoint is there a better explanation than what I have written?
The only thing I’d add is that since FAFSA is used to decide if you are Pell eligible that the EFC is probably irrelevant. If you put enough $ into a retirement account to get hit with a $4K increase you are unlikely to be Pell eligible.
Thanks everyone for your input and insight. Paying for college is a tough hit to a family’s budget.
The budget “hit” can be spread out over 22 years and not just four. There is about an 18-year advance notice about it.
Anyone who earns enough where an annual retirement contribution adds $4k to their EFC is very likely well beyond Pell eligibility anyway.
If your schools give great aid, then they probably require CSS Profile. If they don’t, then likely the $4k increase probably makes little/no difference in aid.
Hopefully your child applied to schools where his/her stats will garner lots of merit money. Your EFC won’t matter for those.
No, I had the same thought that it’s not an “expectation” that contributions to retirement accounts stop, but rather simply an acknowledgment that the money is part of the student’s or parent’s income, and a discretionary allotment has been made.
The only one who doesn’t tax those pretax retirement contributions, is the IRS. At least not in the year contributed, but when you withdraw them.
Possibly your state (in PA we get taxed on the income in the year contributed, but not when withdrawn).
But they are taxed by soc sec and medicare tax, and are counted as untaxed income on FAFSA.
But you are still ahead of the game if your employer matches your contribution, that is like “free money” to you.
I’m confused: I have a similar situation. I made 66k and had a non-taxable contribution of 15k, which included opening a new IRA that year. BUT they used the 66k as my income even though the 15k would have reduced the taxable income substantially (43k). Did they ADD 15k to my 66k? My EFC was HUGE after adding in the 15k. It became almost 14000. Do they really think a person who takes home less than 45k can afford to pay 14k a year for college? Living in NYC no less.
The expectation is that what parents and students contribute to college expenses will come from past savings (most parents have 17+ years to anticipate these expenses and try to build up some college savings), current income, and future income in the form of student loans. There is not an expectation that the entire EFC will come from current income.
Your EFC was $14,000 based on your income of $66,000 which included your pretax retirement contribution.
And again…that sounds accurate to me as the EFC number.
You won’t have to pay $14,000 a year IF you choose a less expensive college, get a TAP grant, commute from home, etc.
Your child could attend a NY community college using TAP and the $5500 Direct Loan…if they commuted from home.
Can you qualify for a simplified assets test under FAFSA? If your income is under $50k (and they would look at the income as taxable income when figuring out if you qualify), you might.
If you qualify, the FAFSA has ‘skip logic’ and skips all the additional income and asset questions and uses the lower income (you said $43k, but $66k-$15k=$51, and you really need to be under $50k for it to work) to calculate the EFC.