<p>Assume a dependent student withdraws basis or principal from his ROTH IRA (student has had the account 5 or more years) to pay college tuition. There is no income tax due since these are after-tax dollars and no earnings are withdrawn.</p>
<p>Does this have zero affect on the FAFSA?</p>
<p>I think I found the answer:</p>
<p>[FinAid</a> | Saving for College | Account Ownership: In Whose Name to Save?](<a href=“Your Guide for College Financial Aid - Finaid”>Account Ownership: In Whose Name to Save? - Finaid)
“If Roth IRA owner hasn’t been invested for five years, withdrawal will count as taxable income, affecting next year’s financial aid.”</p>
<p>Thus if the owner has been invested for five years, it looks like the withdrawal will not count as taxable income and will have no affect on financial aid.</p>
<p>It will have an effect on financial aid to the extent that you now have that much extra cash in an unprotected account. IRAs are not reportable on FAFSA; cash is. If this cash is sitting in a student account, 20% will be added to the student’s EFC.</p>
<p>Just make sure that money is not sitting in a non-retirement account on Jan 1. If you have a September tuition payment, take it out of the Roth in the summer, spend it on tuition, but don’t have it on Jan. 1.</p>
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<p>This makes no sense to me. Regardless of whether the money has been invested for five years or not, the principle of the Roth has already been taxed, and withdrawal of principle is not a taxable event in the eyes of the IRS. It is not income in the year withdrawn (unless you are withdrawing the EARNINGS on the principle…then only the earnings piece is taxable).</p>
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<p>Why Jan 1? FAFSA asks for your account balances on the day you file the form, not Jan 1. As long as the money has moved in/out of the account before you file for FAFSA, it wouldn’t be a reportable asset, no?</p>
<p>Bumping this question, as I am questioning the same thing as msmayor. I am wondering about a parent owned Roth IRA held less than 5 years. Since the contribution to the Roth IRA was made with after-tax dollars, why would the distribution of just the principle have to be added as untaxed income for the following year’s FAFSA?</p>
<p>Why? Because the rules say so. It makes no sense to me either, but that’s what the rules say. Same reason why kids assets are assessed more than the parents’ and why step parents financials are included .</p>