<p>I have 2 children, one a freshman in college and the other a freshman in high school. My husband is encouraging both of them to start IRAs with their summer earnings. I feel this would adversely affect their financial aid for college. Would putting money in IRAs reduce their financial aid as it would look like they have extra money to put away for retirement?</p>
<p>I am not a financial aid expert...just a parent.</p>
<p>Why are you concerned that this would adversely affect your child's financial aid? </p>
<p>I applaud you husband for encouraging your kids to start a (small) retirement nest egg. Perhaps you can reach a compromise here...have them put a small amount in an IRA and have the rest in a savings. Keep in mind that the money in a retirement account is not included as an asset but any money contributed TO the account IS added back in as income for the tax year used for your finaid (e.g. this year's applications were done using 2007 tax info...any contributions TO retirement accounts were added back but the balance IN the account is not counted as an asset). AND remember too, that any money held in the student's name in a savings account is tapped into at a much higher percentage than any amount held in the parents' names.</p>
<p>As long as your kids have earned income, they (or you on their behalf) can contribute up to $4000/year to a Roth IRA. Assets in a Roth IRA are excluded from FAFSA, but withdrawals (which are qualified if they're used to pay for college expenses) are considered income. If you don't need the money to pay for college expenses, then it's a great idea to start your kids off with a retirement vehicle that they can add to over the years.</p>
<p>Bear in mind that though IRA monies are not technically used in asset figures, the colleges do ask for the accounts, and those that use PROFILE, take them into consideration, though not necessarily on a dollar for dollar basis.</p>
<p>Roth</a> IRAs and Financial Aid - Kiplinger.com</p>
<p>It appears FAFSA only schools do not require this to be reported.</p>
<p>I know PROFILE schools have access to the information because I just filled it out and specifically remember answering that question. PROFILE schools have the information and, at their discretion, can include or exclude a portion of the IRA savings.</p>
<p>I think for Child #1, the school will see his whole income, and even if he put some in an IRA, they will still assume the whole income is available to contribute to college expenses. In other words, they won't just look at the AGI...they will add back in the IRA contribution when calculating the student's expected contribution.</p>
<p>Here's how I look at it: If I were a PROFILE school, and student came to me asking for financial aid, and that student had $10k in an IRA, I would expect them to liquidate 25-50% of that IRA before I gave them a dime in grants. The reason is IRAs can be withdrawn without penalty to pay for college expenses. It doesn't make sense to me as a college to be giving out grants to students who have saved for retirement before saving for college.</p>
<p>Personally, I don't agree it is a good idea to save for retirement at this time when facing college expenses. If they really expect to go to college, and you don't expect to have the full funds to pay the expense without financial aid, then it seems to me your first priority is to save for college. Putting money in a 529 account can have two benefits...many states contribute a percentage (mine contributes 10% up to the first $4000 in 529 account contributions) and the funds are an asset in the parent's name.</p>
<p>FAFSA requires the contribution that year to the IRA to be added back to income. They do not take the IRA assets into account. Most PROFILE schools do not take retirement funds into account either in direct equation, but they take EVERYTHING into account holistically.</p>
<p>We and DS were eligible for unsubsidized Stafford and PLUS loans because of our nonretirement assets. The merit scholarship was independent of FAFSA. We had S put $2000 into Roth and what was left over was dedicated to reducing student loans. His need for spending money was minimal since he lived on campus, free city bus. The student loan's interest rate was much lower than it is today. I would recommend that the kid's earnings be used to either pay for the interest on the student loans or to reduce the loan amounts.</p>
<p>If your son is state taxed on wages, S should consider a 529 that has a state income deduction. Our state has a 9% state tax and a 529 allowed S to gain back the state tax with zero investment risk.</p>