My wife passed away last year (the base year for my son’s FAFSA) and I rolled over her 401(k) to my IRA. I’ve been told recently that, even though this rollover wasn’t taxable, it is counted as income or an asset on the FAFSA which, if true, is ridiculous. In any case, it’s a fairly substantial amount (roughly $150,000) and I’m concerned about its impact on my EFC for the base year. I’ve been told you can write a letter to the colleges to which your child is applying to explain the situation. Has anyone ever done this? What kind of letter did you write, when did you send it, and to whom did you address it? Did it work? This must be a very common situation, which makes it all the more dumbfounding that the government hasn’t “fixed” this on the FAFSA.
Rolled it over. Reportable (I did get a 1099) but not taxable. She had another, smaller IRA which I did inherit, but the bigger account was a complicated mess in a much smaller company. I wanted the money out of there. Of course, I might have acted differently had I known this would have been a problem. In any case, what’s done is dine. I just have to minimize the damage.
“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. Trust funds must be reported regardless of whether or not the funds are currently available to you or your child. On the FAFSA, if only interest or principal will be available, the present value should be calculated by the trust officer and reported accordingly.”
This is from the most recent Forbes guide to Financial Aid.
I’m sorry to hear about the passing of your wife. I believe if this is a rollover into another tax deferred account, it is not income for you. It went from one tax deferred account to another, right?
OP-is the confusion possibly the difference between the income implications of the retirement accounts vs. the asset implications?
Your retirement assets don’t get reported on FAFSA. Any distribution you take (i.e.not a rollover, but an actual check that goes into your checking account) IS income, and taxable in that year.
But you aren’t taking distributions yet if you are only 50, and since you rolled it over and didn’t “inherit” your wife’s IRA you aren’t required to take the minimum distribution (yet).
So no income from these retirement accounts, correct? And the assets are excluded.
I think someone may have assumed if he got a 1099, and it is on the tax return, it will increase EFC. However, as the “taxable amount” is zero, there would be no impact from the rollover itself.
Thanks, all. This information came directly from my financial aid advisor—he said it was a quirk in the FAFSA. If this is spurious, then his credibility is clearly out the window, and “fixing” this nonexistent problem is just part of his sales pitch for services. The taxable amount is indeed zero, and the code is right there on the 1099: withdrawal due to death and rollover into IRA. I haven’t done the FAFSA before (that fun I can look forward to later this year/early next year), but I’ll keep any eye out for potential problems associated with this. It’s possible, I suppose, that people incorrectly report these kind of events on the FAFSA and thus penalize themselves unnecessarily.
I think when the IRS retrieval tool brings over the tax return information, it lists the rollover amount as income, but there should be a way to zero that out. You can then show the school the paperwork that proves this was a rollover.
Also if the 2015 tax return was filed jointly, and your wife passed away in 2015, find out from the schools’ FA office if you can just report your income.
Is your son starting college in 2017 or 2018? The FAFSA for 2017/18 would ask for 2015 income information, and 2018/19 FAFSA for 2016 income information.
Indeed…if youmuse the IRS Data Retrieval Tool, that rollover will appear as income. We had that two’years ago. My recollection was that we had to go,in and hand enter that rollover amount someplace,else on the fafsa…but I don’t recall exactly where.
But I thought the fafsa folks were working on a fix for this glitch on the DRT use. Hoping @kelsmom chimes in.
A few colleges address this. As @mommdc said, it creates an issue with the retreival tool is all, you have to let the schools correct the “nontaxable” part.
"I used the IRS Data Retrieval on my FAFSA, and my untaxed pension or untaxed IRA distribution rollover was incorrectly brought forward. What do I do?
Do not change the data imported into the FAFSA. Submit a copy of your 1099-R along with a signed statement with student name and id number to the Financial Aid Office. The 1099-R is necessary to confirm that the amount is a rollover. With this documentation, we will remove the rollover amount from the FAFSA."
Thanks a lot, everyone. So it is a potential issue, but resolvable. This has all been very helpful—it seems to be a matter of just paying close attention and following up. I was planning on doing exactly what you recommended, HRSMom: submitting a copy of the 1099 indicating the rollover to the school financial aid office.
Give the financial aid offices a call. Tell,them the issue and ask how to,deal,with it. They will,tell you what, if anything, to,send…as well,as where to send ti!
It is an issue, and it is relatively easy to resolve (it may not make any difference in financial aid, depending on your individual situation). You need to contact the school to ask them to remove the IRS rollover - you’ll need to provide proof of the rollover.
The FAFSA kinda-sorta fixed the rollover issue with its new instructions, but you still have to have the school remove the rollover if there was an IRS DRT done (because you should never alter any of the info from the DRT yourself).