<p>I've been tinkering with NPC's to learn about the impact of different variables on an EFC. It seems like if I reduce taxable income by switching some income to pre-tax contributions to a retirement plan (403b) there is no difference in EFC. BUT, such a move lowers tax paid for that year and that seems to raise EFC. It actually seems detrimental (not just neutral) to contribute to a tax deferred plan during the years a child is in college. I'm guessing this is because a lower tax bill is counted as lower expenses for the family and thus more money to spend? Can anyone confirm for me that I'm right about this?</p>
<p>It's strange because savings in a tax-deferred plan are not considered for EFC but during the years a child is in college you are penalized for contributing. Unless I'm getting something wrong here?</p>
<p>Yes, it lowers your taxes, which has the effect of raising your EFC.</p>
<p>It also removes the funds from assets that are counted towards your EFC. This will offset the increase in EFC due to lower taxes to a large degree.</p>
<p>I noticed this odd situation last year as well. Fortunately, my employer offers a Roth 401(k) so I pay taxes now on my contributions (and receive credit on CSS Profile for the tax expense) but will get the earnings tax free after the kids are through college. As notrichenough points out, this also removes the assets from consideration.</p>
<p>My wife’s employer does not offer the Roth 401(k), so we put $5k in her Roth IRA instead.</p>
<p>The problem with a Roth is that you have to come up with the money to pay the taxes, which will be double what you potentially save in lowered EFC.</p>
<p>And that is assuming the school will give you free money (rather than loans) for the entire difference between the COA and your EFC. There are very very few schools that do this. So you are more likely to have to pay the taxes and then not get any more money from the school.</p>