Is ROTH better?

<p>My son is going to college this fall. I have a choice to invest in traditional or ROTH IRA. Whether ROTH or regular contribution for the current year gets added to your income. Only difference being, with ROTH it will be post tax money, meaning the amount that will get added to your income will be minus taxes.So in nutshell, you are shielding additional tax money from EFC. I don't know what happens with higher taxes you pay because of investing in ROTH. </p>

<p>Where are you reading that a current year ROTH IRA contribution is added to income in determining EFC per the FAFSA?</p>

<p>Contributions to traditional IRAs are added back into AGI if you deduct them on your tax form, Roth contributions are already included in AGI so that’s a wash. You do get a slight reduction in EFC because you paid tax on the Roth contributions. How much of a reduction depends on how much you contributed and how much tax you paid. But then paying more tax you have less cash on hand to pay college expenses. It’s probably not enough for this to control which kind of contributions you make. Make the decision based on the other decision points between Roth and traditional.</p>

<p>The Roth contribution is NOT added to income for FAFSA purposes. Contributions to tax deductible vehicles like HSAs, IRAs, 401Ks and the like are added back to income because they are subtracted from income that is reported as the 1040 line itmes as AGI which is what is used for FAFSA. FAFSA does not recognize that tax deduction so it’s added back in. The ROTH contribution is not deducted from income, therefore, it does not have to be added back in.</p>

<p>So regardless of whether you contribute to a ROTH IRA or a regular IRA, the income figure is going to be the exact same amount; if you contributed to the ROTH, it would pretty much be the AGI. If you contributed to a regular IRA, it would be the AGI plus the contribution to the IRA added back because the 1040 allows you to deduct the IRA contribution whereas FAFSA does not. The only difference in terms of income used on the FAFSA between the two scenarios would be that you actually will get a slightly lower total income reported when you contribute to ROTH because you will owe more income taxes than if you contributed to the IRA which lowers your AGI which then means lower taxes. The FAFSA formula subtacts out the taxes you pay. However, you pay more income taxes when you go the ROTH route because it is not tax deductible. How much of a difference all this makes depends on the individual numbers, but my guess is that most of the time you’ll do better that given year on the net income if you contribute to a regular IRA and get the state and federal tax reductions due to the contribution.</p>

<p>College financial aid possibilities should not be looked at in a vacuum; the whole picture is important. I’ve seen people do all sorts of financial gymnastics for nothing. Or maybe they get a bit more fin aid, but the things they did to get it impacted long term financial issues adversely. There are some differences in the ROTH and traditional IRAs that are important to asses in deciding which one to choose. The difference it makes for FAFSA purposes, IMO, is negligible. I’m not an accountant or a financial advisor so , what I’m saying is just a generality that I have noticed and each person needs to check out his/her own circumstances. An IRA defers taxes on the money you put away as well as the earnings. The Roth shelters the earnings and you pay your taxes on that money right now. Also the rules of accessing the funds vary. Taking money out of a Roth is still income, by the way, on FAFSA because you get to exclude that asset from your listed assets. Kind of unfair you have to include withdrawals from these plans as income especailly when they were already counted as such the year you put the money in if those are FAFSA years.</p>

<p>So do remember that putting money in those plans means that if you make withdrawals you will have to report them as income on FAFSA that year, again, if you just put that money in during college years. Stinks, yes. But them’s the rules.</p>

<p>It won’t matter. A Roth is already included in your income. A traditional IRA contribution will be added back in. For FAFSA proposes, the balances in neither are assets.</p>

<p>Do what you want.</p>

<p>^^ Great posts! To clarify one point regarding the tax differences between traditional and Roth IRAs (because the difference between deferred and sheltered is sometimes overlooked): when one withdraws money from a traditional IRA, the money (contributions and earnings) are taxed as ordinary income. In contrast, when one withdraws money from a Roth, neither the contributions nor earnings are taxed. </p>

<p>To clarify, it depends on a few additional factors as to whether both the withdrawn contribution and the earnings are not taxed/penalized, but this is not a tax advice message board. Consult your CPA tax advisor.</p>

<p>But to make it perfectly clear: Withdrawals from BOTH the ROTH and the regular IRAs are considered as income on FAFSA and PROFILE. So it’s a bad idea to stash money you will need to withdraw during those years that count for college finanical aid if your student may be eligible for financial aid at a college, Income figures are the biggest drivers for the aid formulas so anything that increases income these scrutinized years will be heavily hit directly to the EFC and need. So even though ROTH withdrawals will not be TAXABLE income (if you don’t withdraw the tax free earnings from the account). those withdrawals will be added to your AGI as additional unearned income for financial aid purposes. The way the system looks at this, is that you didn’t have to include the ROTH as your assets for financial aid purposes, so anything coming out of that account is income from an unaccounted for source. </p>

<p>Advantage of regular IRA is you are investing 20-30% more right up front depending upon your tax bracket. If your investments are working for you then over time, this will easily offset any small saving in EFC that you get which will be there for 4 years. </p>

<p>If you are trying to save money to pay for college in an IRA, save only for the senior year of the last child to go to college. It won’t count as income on the FAFSA because you won’t need to fill out a FAFSA then. If you don’t use all of it, it’s there for retirement. As indicated above, be aware of the restrictions and possible costs of withdrawing from an IRA.</p>

<p>How does a Roth IRA impact the CSS profile?</p>

<p>@Madison85 -You are right regarding consulting CPA regarding whether Traditional or Roth IRA is better for an individual from a tax/investment standpoint. I was trying to expand on one point in captain’s excellent post in case it was misinterpreted. I agree that this thread should be limited to impact of IRAs on EFC.</p>

<p>It is important when discussing the impact of IRAs on EFC (or asking questions) to distinguish between contributions, balances in accounts, and withdraws. </p>