Hello, I recently got accepted into college, but they said that I needed to fix some errors on my FAFSA. I transferred information from the IRS to my FAFSA, but on Question 94f it states that I need to subtract rollover amounts from Pensions and annuities. The thing is, I don’t know what rollovers are. It states that I need to subtract lines 16a and 16b (16a - 16b), but when I do, I find that the number is very high. I’m not sure if it’s supposed to be that high, or if it should be lower.
I’m sorry if this is a dumb question, I just want to get the most I can from financial aid. Thank you.
Did you (or your parent) roll over money from one retirement plan at a former workplace to a different retirement plan? If you (or your parent) didn’t do that, then there shouldn’t be any numbers on the rollover lines.
Are you the student? Did your parents withdraw money from a retirement account? Or did they take money from one retirement account and rolled it over into another retirement account?
You might need to contact the school and see what documentation they need if indeed there was a rollover.
Because otherwise the retirement account withdrawal will be included in income for FAFSA.
Okay, former tax accountant here, who did take a rollover and did fill out a FAFSA this year.
Very short (mechanical) answer is line 16a on the 1040 would be your 72k-ish number and 16b would be zero, as you stated. But the instructions you’re citing (which may be what you really saw, but may not be, regardless, no matter, it’s wrong) that is telling you to subtract the taxable distribution ($0, because it’s a tax-free rollover) from the gross distribution ($72k) to arrive at the taxable distribution is a mistaken methodology. To fix your problem, ignore the line item 16b designation, because that is an error. If it is truly a rollover, subtract the amount rolled over (probably the entire 72k but not necessarily) from the amount in line 16a (the gross distribution). This will give you the taxable amount (likely zero) and the amount you should report on your FAFSA.
Your parents (I’m assuming its not you based on your confusion about rollovers) probably took a rollover, and when you imported their tax info from IRS into the FAFSA, you didn’t respond to the warning prompt that said “hey, big pension plan payout reported on 1040, was this a rollover?” but just let what populated from the import ride. I think this caused the result you got. I know I had to change that line item import on my son’s FAFSA to reflect that it was a rollover (and thus not taxable, and thus not FAFSA’s “taxable income”).
Backstory: If you leave a company, you have the option of taking your money out of the pension and/or 401(k) plan you had at the company and depositing the money into an IRA at a financial services firm (like Vanguard or Fidelity, etc.). If you do it properly (i.e., you don’t touch the money but just have it go straight to the new IRA account), it’s called a “rollover”. This is what most people do, as the tax implications of not doing it are pretty miserable (income tax plus 10% penalty tax on a rather large sum of money).