If IRA assets are converted to a Roth IRA, are the IRA assets picked up on the FAFSA as income?
I think I have my answer. It will bump up the income temporarily for FAFSA purposes, however if you call the FA office and explain it to them, they are permitted to use professional judgement and not count the income.
It’s not a sure thing - you are taking a risk that PJ won’t remove the income.
@Kelsmom Would you use PJ to take income out of AGI for a traditional IRA conversion to a Roth?
Honestly I do not know. My husband asked me this question and I thought I would ask it here. I think yes- you could ask the school to remove it from the AGI because it’s a one shot spike in income.
I would use PJ to remove the payment from the AGI as long as I had documentation to show the money was moved to another retirement vehicle.
^^But this is different than just moving the money. The IRS treats it differently because it really is income for the year in which it is transferred. The taxpayer got a tax benefit in the year the original deposit was made (that money was excluded from income) and now has to pay the tax on the income (it is income) in the year it is converted.
It’s not the same as moving money from a 401k or employer IRA account to another account, without tax consequence, because of changing jobs or just wanting a different investment firm. I’d think there would be many FA officers who will not use professional judgment to override this transfer.
Thanks @twoinanddone, I didn’t know that.
I looked into it more here at my office, and we would actually consider a special circumstance in this case. At least from our point of view, we would be looking at it from the stand point that the family still doesn’t have access to that money as it is now in a different retirement vehicle. However, each school may have a different policy regarding the specific tax implications. This is definitely a conversation to have with the prospective school.
^ this is how I understand it. Thanks everybody for all of the input! I will call the school and ask.
When I converted my IRA to a Roth IRA back in 1998, I had to include 1/4 of the value in my taxable income for four years. But it was listed under retirement income on tax return, not work income.
I don’t know if that option still exists. Or how a school would treat it. But if you could show that it was a conversion and the money is still in a retirement account, they might not count it.
I did the conversion early on when there wasn’t that much money in the IRA yet. Less tax to pay.
I looked into it and it seems that after 2010 you are no longer allowed to spread the income from a conversion over two (or more) years.
It might be prudent to wait until D is done with college.
Thank you so much for all of your help! Yes we will probably wait until D graduates.
If I was the financial aid officer and deciding on professional judgement, I would consider that this family is CHOOSING to pay more federal and state income tax due to choosing to convert to Roth IRA. The additional income taxes paid could have been used to pay COA. So in effect the school/government is subsidizing the family’s retirement if the school removes the conversion from income and also doesn’t adjust down the amount of federal income taxes paid (FAFSA question #86), and the aid increases.