I am being told by some friends that if a kid is going to college, one should maximize the contribution to tax deffered accounts. This action results in lowering parental income, say one make 120 dollars, contribute 20 dollars to pre tax deffered accounts. Thus only income parent can show is 100. Friends are saying that take loan and repay back. Their kids go to colleges where they are filing FAFSA. By doing this they got more aid. Does it make sense? Is this step also true for colleges that ask for profile and detailed finiacial information as college ask tax deffered income as I see in NPC calculator. I am confused. What has been your experince in both type of schools that only looks FAFSA, and one that ask PROFILE on top of it.Thanks
Unless your friends are certified public accountants, I wouldn’t take their advice. There’s a contribution limit of how much you can put into a tax deferred account anyway. You can’t put half of a 100k salary in a tax deferred account. Most banks are setup to keep you from doing that. If you managed to get around it, you’d be in jail for tax fraud 
My employer and my wife’s employer allows us tax defferd accounts there is no tax fraud. My own friends are not in jail. plus we both are above 50.
I should have have said what is maximum lawfully allowable for tax deffered income. Does it help in getting more aid?
And we live very frugally within our means.
Money you contribute to tax deferred retirement plans reduces your taxable income…yes.
BUT the contributions you make in the FAFSA year are added back in as income for financial aid calculation purposes.
So…if you are completing a 2018-2019 FAFSA…the contributions to your tax deferred retirement accounts in 2016 will be added back in as income for 2016. The balances IN those accounts are not listed as assets on the fafsa.
So…on you example…if your family income is $100,000…minus $20,000 contributions to tax deferred retirement…your taxable income would be reduced BUT when the financial aid calculations are done…that $20,000 contribution is added right back in to your income… cause it IS income from 2016…and it is your choice to use it for retirement savings…just like it would be your choice to spend it any other way.
@BelknapPoint @Madison85 your thoughts?
listen to @thumper1 .
She knows what she is talking about.
A 401k plan allows contributions of up to $24,500 in 2018 for people age 50 and older.
A tax-deferred 401k contribution is added back to income for the FAFSA EFC calculation but the balance in the retirement plan is not an asset for FAFSA purposes.
I’m not sure if there’s a ‘strategy’ to have each spouse who earns $55k per year contribute $24.5k to a 401k and $6.5k to a deductible traditional IRA to get total AGI under $50k so then assets don’t count in the FAFSA EFC calculation (simplified needs test criteria).
@thumper1 thans. if that is the case that it is added back, then I rather pay to my ROTH IRA than tax deffered account. It is good to know that balance in tax deferred account is not counted as assets as we have pretty good savings in those. Do they count ROTH IRA savings as assets? Do you know about it?
I was wondering about it as NPC calculator asked about Home Equity but not tax deffered requirement accounts and ROTH IRAs. Did I miss somethings in my calculations, just trying to make sure.
It’s a good strategy prior to those college years since money in retirement accounts are not counted as assets. But as already pointed out, during the college years those contributions will be counted as income.
Got it, that is what we did contribute towards those accounts prior to college years.No more contribution as I do better in ROTH IRA’S than mutual funds.
I believe the only time home equity comes into play is if the school requires a CSS. We didn’t have any CSS schools and we were never asked about equity, cars, etc…
Yes, for FAFSA schools putting your money into our primary house is a good move since equity is not counted as an asset. For Profile schools it is counted (I think there are some exceptions), but often the amount is capped to some amount relative to your income.
ulta—I thought you can only put 6k max annual per person in Roth, while you can put almost 24k (for 50+ age) in 401K. So Roth is not really even a comparable replacement for putting money instead of a 401k.
not saying anything
OP- what happened to your portfolio in 2001/2002, 2008/2009, or even 1987?
Just curious. You do realize that you may need your money during a big market downturn and will have no choice but to cash out some of your stock at the lowpoint- right???
Claremont–putting money in your primary home does not reduce the “visible” income for Fafsa purposes. Your income for EFC calculation is not impacted.
So not sure how that helps.
Profile schools are all over the map as to what counts as income - some add it back, some don’t, some only add a portion back.
I have heard of folks socking money away in their 401(k) plans, and then taking a loan against it to pay the school bill. They have claimed they got better FA by doing this, but I don’t think they truly understood the FA process.
@mannysan1 - I didn’t say it reduced “income” … I said it reduces your assets. Home equity is NOT used for Fafsa purposes.
Hi Claremont—I am still unclear how putting money into own home will help for Fafsa? I agree it will not reduce your income, but then it will also not reduce your assets. Then how does it help?