We’re trying to position our finances for the future when our 2nd child will enter college and were wondering if it’s more beneficial (for purposes of reducing our EFC) to make our retirement contributions to a regular 401(k) to reduce our AGI, vs. a Roth 401(k). Regular 401(k) contributions reduce our AGI, while Roth 401(k) contributions do not but am not sure whether we need to “add” them back in to our income to determine aid eligibility? We have one entering college this year and have an EFC of ~$35K, so it could have an impact in 2 years when the younger one heads off to school.
Realize that if you’re talking about FAFSA only schools, then cutting your EFC in half may still mean no aid. You’re beyond Pell either way.
This is always surprising to parents when they’re “full pay” for (say) a public with an EFC of $35k. They often wrongly think that once their EFC splits to $17k per kid that suddenly the school is going to give them the difference.
Usually, that is NOT the case. Many schools only have fed aid, and since EFC is too high for fed grants, all you get is loans.
What schools would be considered? What school is your older child attending? A private that meets need? A public or private that doesn’t promise to meet need?
As for CSS schools, they’re formulas are different and they’ll likely just add back in anything and everything no matter where money is put. That said, they don’t do a 50/50 split…they do a 60/60 split.
Looks like older child will be attending UNC (instate). Well, UNC promises to meet need, but it is a CSS school. so, it doesn’t matter what the FAFSA rules are…you need to find out what UNC does as a CSS school.
For FAFSA, any contributions to both 401(k) and a Roth IRA will show up/be added back as income for the year of contribution. But those dollar amounts will “disappear” from next year’s FAFSA. as retirement account balances are not
used to calculate FAFSA’s EFC. If you end up doing a CSS Profile, they do ask for all retirement account balances – but how those figure into your “need” depends how the individual college wishes to handle it.
Thanks for the feedback, and yes, my older is attending UNC next year…unsure of the fate of the younger as it’s a few years off.
Another complicating factor re: the 401(k)/Roth 401(k) is the AOTC MAGI limits, which we may be bumping up against in the coming years. For this, it appears 401(k) is preferable over Roth 401(k) and may end up being the best (only) tax break we get.
mom - I understand grants are probably out of the picture, what about fed subsidized loans?
Wait…isn’t a Roth already included in the taxable income…it is a post tax IRA. I don’t believe anything gets added back in…because it’s already IN.
Contributions to pretax retirement get added back in as income.
Before you go through these financial gymnastics…look at your income. Your income is actually the big driver in terms of family contribution for college. If your income is above a certain amount, you might not net any additional money anyway.
And if your college(S) does not meet full need, all of this financial manipulating will do nothing to gain you additional aid.