Last year my 25 year old daughter inherited a IRA worth $11,000 from her boyfriend who unexpectedly passed at 27. (God bless him). She currently attends court reporting school which has started to distribute financial aid the last two years. She attends full-time & does not work. Recently, the financial aid office has told her she needs to take all the money out & report that as income. Now, I know if she takes it out before 55, she will be penalized. What I know from the company who has the IRA, they have told us each year they will distribute out to her, the very least, $200 each year & until the Account is at a zero balance. What she plans on doing with the distribution is investing in her own IRA to mature & grow. Now, my question is, does financial aid have the right to demand you to take all money out & report as income for financial aid, or should she tell them she can’t take it out until she is of retirement age? I know the yearly distribution will need to be reported as income, but does that effect her financial aid? Also, she has about 2 more years of schooling left. Any advice would surely help as we have no experience with inherited IRAs & it seems not too many people we know really know what the next step is. Thank you so much
The money that is in the IRA is retirement money, and is invisible to the FAFSA application. She needs to look at her FAFSA and make certain that she did not put this IRA as regular savings. It is my understanding that this IRA is an inheritance, and therefore is not treatable as income.
It is my understanding that because it is an inherited IRA (also called a beneficiary IRA) she will be obligated to take the minimum withdrawals every year. The company that holds the IRA can do the calculations. That is where the $200 comes from. It also is my understanding that an inherited IRA can be cashed out completely with no early-withdrawal penalties if the person so desires, but that is something that would need to be investigated carefully.
She has to have earned income of her own in order to start her own IRA. She can’t just use the $200 from the inherited IRA for that.
No, the financial aid office cannot insist that she use all of her inheritance to pay for her education. However, they can fail to award her any federal financial aid that she qualifies for because of their own disorganization or neglect, and she might find she has difficulties in paying for her studies. If she is not to far into her program and has other options of places to study, she might consider doing that.
@kelsmom is a financial aid officer who may have good information for you.
To add to Happymom’s fine post which has one factual error:
is this a for profit school by chance? And if so, is there a non profit community college she can attend for the same program?
And there ARE penalties for early withdrawal of an inherited IRA, just like any other tax deferred vehicle.
But the extra $200 distribution should not impact her financial aid in any meaningful way (it’s just $200).
An inherited IRA is different from your own IRA. You can take it all out with no penalty - but you need to pay income taxes. In fact, she will be required to take out a minimum distribution each year based on her age. There is no waiting until age 70.5 with an IRA inherited from a non-spouse.
They can’t require her to do anything. They can decide not to give her financial aid, but it’s up to her as to how to pay for the court reporting school.
Apologies for having misposted, Momma is correct- you can take it out with no penalty but if you take it all out, the entire lump sum is added to her income that year for tax purposes. But the real “hit” is that she loses the opportunity to have this nest egg growing tax deferred.
But again- for profit school?
Why does it matter if it is a for profit or not? The school has some FA it gives to students. For this student, it seems it will not give FA because the student has an asset. A non-profit school can do that, a for profit school can do that.
True, but I think people may be looking for an explanation as to why the school told the student that she “needs to take all the money out” of the inherited IRA. I can’t imagine that a reputable non-profit school would make this demand. Coming from a for-profit school, this wouldn’t surprise me. The more logical explanation is that there has been some miscommunication or a misunderstanding.
Also…depending on what type of IRA it was originally, will affect the tax treatment. If it was a traditional IRA, then yes there will be a tax hit on the MRDs (minimum required distributions). If it was a Roth IRA (which would have been set up with post tax earned income), then she will not have a tax hit. Honestly, I don’t understand how the FA can demand she take it all and use it.
FA can’t demand she take it. If CAN make that a condition of institutional FA. It’s looking at a pot of money that can be used for education. It may be a school that only gives FA as the last dollar and requires all other sources to be tapped first.
Unless the parent misheard, or the D misheard, the language used is SO not what a financial aid officer would tell a student at a not-for-profit. And since “court reporting school” doesn’t sound like a non-profit, degree granting institution and sounds very much like a for-profit business, I am suspicious.
Yes it matters. The amount of fraud that takes place at for profit institutions is horrifying. Just trying to clarify here if this is for a Bachelor’s degree, an AA, a certificate or whatever. I would be looking very closely at the financial underpinnings of any college which made such a request (or demand) of a student.
It’s perfectly permissible to say that kids with assets of X don’t qualify for institutional aid until they’ve exhausted those assets. It’s another to tell a kid- liquidate your account before we’ll consider giving you aid. Note there are no guarantees here- the D could liquidate the account and STILL not qualify for a penny.
I would tell your daughter to keep the money IN this IRA. It is a nice gift from her BF, and I’m sorry to hear about his death.
The reality is…this court reporting school likely doesn’t meet full need for students with its financial aid anyway. So withdrawing the funds would simply mean…she wouldn’t have them in her retirement portfolio…it would NOT mean additional aid…it would probably mean LESS.
I agree with @blossom this is NOT anything a reputable college financial aid official would every suggest to anyone.
How did this individual even KNOW about this IRA account balance? It’s not mentioned at all on the FAFSA…and it would be appalling to me if a court recording school financial aid office asked this as a separate question.
Isn’t court reporting school only one year long? How much does this school cost?
If it’s a FOR profit school, i would suggest your daughter look elsewhere to get this training.