“However the parent saves $1000 in taxes. So net saved is $530 vs just not contributing to Pension and getting $470 less in EFC.”
But if the parent puts the after tax $9000 in a Roth 401(K) then he/she just gets $470 less in EFC and still has the pension money with tax already paid (instead of paying taxes on withdrawal in retirement).
Putting money in a Roth account would have no impact, income or income tax wise, on an EFC, because the Roth contribution makes no change in the AGI and is not reported on FAFSA as untaxed income.
Life is not all about college, and these years often get a disproportionate amount of attention. There are good reasons to stop Qualified pension plan contributions to meet immediate costs, but there should be a lot of thought, planning and number crunching before one does this. The same with taking out PLUS, HELOC, and other measures that can affect your life long after those short college years. I’m not against taking those options, but tho who do should do their homework and run their personal numbers in light of personal circumstances
I have a friend who has 3 wonderful daughters. All of them aspired to their flagship U from Day one where their parents had gone and to which they maintained great contact.
They had a single add and then a set of twins a year later and heard much hullabaloo about how much financial aid they would be entitled to get with all 3 in college at the same time. Well, uh, not so much. They could get some of those Direct Loans subsidized. Maybe a bit of work study. But their EFC pretty much came up to the cost of all three at State U which was more than they could pay out of current income and savings.
So the 401k contributions other than employer match got cut, a timely, extra low interest rate HELOC obtained and my friend went back to work part time seasonally, as she had health issues that did not make full time employment prudent. But the job meant unemployment benefits for half the year, and Every Frigging Cent counted.
So, there are reasons to take measures that are cautioned against. Putting the whole life picture into focus is always a good idea.
But if the worker takes the Roth option and pays the tax, she’ll have less cash NOW to pay for college. The income is still $100k, $10k is in the Roth, she’s actually paid $$$ in taxes so can reduce the FAFSA totals by that paid tax but income is still $100k.
The parent doesn’t have the cash to pay the EFC, even if it is a little lower.
The CSS question on qualified retirement funds is NOT used to increase the EFC. It solely to guage future fin stability. “Ish.” It’s described this way in CSS background info.
Some schools do use qualified pension plan assets as part of the financial aid calculation.
“But if the worker takes the Roth option and pays the tax, she’ll have less cash NOW to pay for college. The income is still $100k, $10k is in the Roth, she’s actually paid $$$ in taxes so can reduce the FAFSA totals by that paid tax but income is still $100k.
The parent doesn’t have the cash to pay the EFC, even if it is a little lower.”
That’s not what I said. You put the net after tax income in the Roth (in the example above with 10% tax rate that’s $9K out of the $10K that would have gone in pre-tax). You have the same amount of cash left in your bank account (and your net retirement income is unchanged if you are still in the 10% tax bracket), but your EFC is $470 lower because you deduct the extra $1K of federal tax paid in the EFC calculation.
However, pretax contributions to 401k or insurance can reduce AGI, and therefore MAGI, which will matter for claiming education credits.
At this point, I suspect we can confuse OP.
He or she can check with the employer whether this retirment is a “Qualified Retirement Plan.”
I also suggest that, if there’s confusion about how a QRP is treated, OP call colleges and ask.
I suppose some college could consider QRP funds- but not sure we know which or how prevalent that is. It was described as simply to guage future fin stability. I can’t imagine a school asking parents to break open qualified retirement funds. They could, however, see the plan is loaded and judge other income and assets accordingly.
"Retirement assets such as 401k, 403b, IRAs, SEP, SIMPLE, Keogh, profit sharing, pensions and Roth IRAs are not included in the calculation of EFC under any of the three EFC methodologies. Assets that aren’t in retirement accounts — balances in checking, savings, CDs, brokerage accounts, money market, investment real estate, stocks, bonds, mutual funds, ETFs, commodities and 529 college savings and prepaid plans—do get included in the EFC formulas.
https://www.forbes.com/sites/troyonink/2017/01/08/2017-guide-to-college-financial-aid-the-fafsa-and-css-profile/#460f0b154cd4
But I’m not going to debate.
ok - can you explain this?? what’s MAGI compared to AGI? I ask because we are super close to that AOTC line . . . . thanks
Well, I meant it will reduce AGI, and therefore MAGI.
The link I posted provides information about MAGI:
@cptofthehouse please show proof that this is true.
^^ we just filled out the CSS profile, and I was surprised that nothing was asked about a pension plan that one of us has. Maybe because there is no specific value attached to it? it’s not in our names? Our 457B - yes - that was asked about.
since Roth IRAs were mentioned above - hope this question isn’t out of line – I think Roth IRAs can be used for Qualified Education Expenses - and does that include R&B?
I appreciate everyone’s thoughts on this all even though I’m not the OP; have been learning as well. thx.
FAFSA does not ask for the value of retirement plans. It asks for the contribution made to the plans that year, and subtracted from income in the Form 1040. That contribution is added back into income.
Certain qualified retirement plan assets are included on the CSS Profile. According to the Profile, student and parent retirement plans (IRA, Keogh, 401k, 403b, etc.) are reported as assets for the respective owners. A student-owned retirement plan will be reported in the Student Assets section, SA-105. A parent-owned retirement plan can be reported in either Parent Data section PD-175 or PD-270. Plans that must be reported are: IRA, SRA Keogh, SEP, 401(a), 401k, 403(b), 408, 457, 501©
However, company pension plans, say , defined benefit plans , do not get reported. Unfair? Yes. But them’s the rules.
Most schools, most of the time, do not include qualified plan assets in their Financial aid calculations But they ask for them. I asked at a financial aid parent meeting with a BC employee, specifically if such assets are included, and I was told that “they are taken into account”. No set number given. The same with Rice University, Johns Hopkins University.
It makes sense that these assets are taken into account if they are “way up there”. The problem is that there is no clarity on what number is “way up there”. I get that someone with millions of dollars in these accounts should not qualify for financial aid. But it’s a professional judgement issue. It’s not included in the NPCs. So, yes, these assets can be included, but we don’t know at what point. That the question is asked on the CSS PROFILE is telling that it is something that the financial aid offices of schools that meet full need want to know.
Written proof that this is used in the financial aid calculations, please.
The Profile also asks for car values for some schools and there is zero evidence that this is used in the financial aid calculations. It’s FYI for the colleges.
There is no written proof by any college that I have seen that they use the retirement assets, or car values as part of their financial aid formula. However, having heard the question asked, as to whether those asset values are ever or never used, it’s been confirmed at three colleges, at parent FA meeting with the FA Officer that the values are used at certain thresholds that they decline to give.
Increasingly, colleges are coming up with financial aid plans (Rice Incentive an example, Hopkins doing something similar last I heard), where financial aid is “guaranteed” at certain threshold of income provided “ordinary financial circumstances” are present. The schools leave that definition open, as things like extraordinary assets, a very expensive house, huge qualified plan assets, a business, other assets may come into the picture.
Many discussions of the CSS PROFILE do bring up the fact that there are schools that use these retirement account values. All info on the PROFILE is not used by all PROFILE schools. That it is requested is some indication that some schools may use that data. That it’s a FYI item only, doesn’t make sense in that the present value of ones vested Accrued pension benefit in employer plans is not requested—THAT info is definitely not taken into consideration.
Not that I recall. In fact, your claim in this thread that “Some schools do use qualified pension plan assets as part of the financial aid calculation” is the first definitive statement like this I have seen. And you have nothing to back it up other than your tale that a BC employee at a parent financial aid meeting told you so. At this point, I’m not buying what you’re selling.
You appear to believe that retirement assets in quailed plans that are requested to be listed on PROFILE never have an effect on financial aid.
I believe otherwise. I don’t believe the question is there simply to be a FYI.
Colleges can use whatever criteria they want in disbursing their own funds. Having seen this question regarding retirement assets come up, not in one, but three sessions with 3 different colleges’ FA officers over a period of years , not a one would state that absolutely the information is not used.
Well, there’s the Forbes quote that there’s no place for them in the formulas.
And what I found in the past was that the question is to assess your future position only. Similar to IFAP accounting for the age of the older parent.
OP can call the colleges and ask.
Do I believe that a family with 100K in income and $10 million in a qualified retirement account is looked at differently than a family with 100K in income and 95K in retirement?
On the margins- and in some cases- yes. On the margins if a family is on the bubble for aid it might get a look. On the margins for a need aware school, where the KID is on the bubble. In some cases- if the kid is likely to be getting preferential packaging of a merit plus need award.
But in most cases, I see no evidence that it’s a factor. I remember several articles when Mitt Romney was running for president trying to explain how the value of his retirement accounts could be as high as he had disclosed-- and pretty much the consensus was that you could be an ordinary Joe in the year you disclose your income (not that Mitt was every ordinary from a financial perspective), but that an analysis of your retirement accounts was a good way to assess what the last two decades of your working life was like.