Interesting. I didn’t know that. I’m going to check that out.
@thumper1, do you know if the distributions from Roth accounts count as income for FAFSA purposes, even though it isn’t taxable income? What about for the CSS?
@thumper1, do you know if the distributions from Roth accounts count as income for FAFSA purposes, even though it isn’t taxable income? What about for the CSS?
@BelknapPoint could you answer this?
I’m pretty sure that Roth IRA distributions count as income for both FAFSA and Profile. I haven’t seen explicit rules saying as much from the Dept. of Education and CSS, but various investing and financial aid websites that I have seen say that this is the case.
It really is a situation where the same income could be counted twice for financial aid purposes in two different years, which doesn’t seem right, but that’s the way it is. If a parent had taken X dollars of income and put it into a savings account instead of a Roth during the reporting year for the student’s freshman year, and then withdrew the money from the account during the reporting year for the student’s senior year, it would only be counted as income once. But make the savings vehicle an IRA instead of a bank account, and it is counted as income twice.
Kelsmom’s story is instructional. Anyone who thinks that careers are like an elevator and you can get on and off at will… well, usually doesn’t work that way. Entire industries shift over the course of a decade. I’ve counseled women who are trying to get back to professional work after taking off 15 years or so and their frustration with “the system” is sad. I tell them, “you really thought the world of database marketing or credit scoring or small business lending or magazine publishing or cruise line operations was going to stand still while you were raising your family?”
Some of the jobs these women left have disappeared. As in- completely disappeared. Combination of the internet, off-shoring, industry consolidation, productivity gains- completely disappeared. When you are a mid-level marketing manager at a regional bank, two things are almost certain to happen over a period of ten years-
1-marketing as you know it will blow up to be replaced by something else
2- your bank will either be bought or become insolvent.
I feel bad for these women individually. Which is why I think the solution to someone with HS aged kids who hates her job is to get a better job, not to exit paid employment to get more financial aid if there is even the slightest chance down the road that the primary wage earner will die, become disabled, downsized, or otherwise NOT be in a position to carry the load financially.
@BelknapPoint, when you say it counts twice, do you mean it counts in the prior year and in the prior prior year?
What I meant was that I thought the protected retirement accounts had a limit to how much could be contributed and therefore there would Iikely be savings in non-protected accounts.
For fun, run Harvard’s NPC. Depending on how low your income is and how much you have in unprotected non home equity assets, you can still get FA with about 1M in investment assets. I asked on a thread last week about home equity. For many full needs schools that do not count or cap home equity you could have almost unlimited home equity and it theoretically would not count.
I was very curious if there were real life situations since the intent was if you bought the house a while ago and the home equity jumped. As opposed to you inherited a bunch of money and decided to buy the biggest house you can find. Seems either situation is fine for FA. If I was working in FA I would look much more closely at the second situation.
Example:
Student will be a freshman in academic year 2018-2019.
Calendar year 2016 is the base year, and parent is still working.
Let’s look at three different scenarios for 2016.
- Parent contributes $5,000 of after-tax income to a Roth IRA. The $5,000 is reportable income on FAFSA and Profile.
- Parent contributes $5,000 to a regular IRA and takes a tax deduction. The $5,000 is added back to income and reported on FAFSA and Profile.
- Parent takes $5,000 from taxed income and deposits it into a savings account. The $5,000 is reportable income on FAFSA and Profile.
Student will be a senior in academic year 2021-2022.
Calendar year 2019 is the base year, and parent is now retired.
Now the same scenarios from above revisited three years later.
- Parent takes a $5,000 tax-free distribution from the Roth IRA. The $5,000 is reportable on FAFSA and Profile as untaxed income.
- Parent takes a $5,000 taxable distribution from the regular IRA. The $5,000 is reportable income on FAFSA and Profile.
- Parent makes a $5,000 withdrawal from the savings account. None of this is reported on FAFSA or Profile as income.
Note that the money is the savings account must be reported as an asset when FAFSA and Profile are filed, but the money in the Roth and regular IRAs is not reported as an asset.
@BelknapPoint, thanks very much for the great example.
I guess there’s good and bad news. It’s too bad that it counts as income, but I guess that’s actually better than if it counted as an asset the second time.
It does seem unfair that it’s counted as income twice, but compared to the money that’s put in a savings account, it’s actually better, I guess. The money that’s put into a savings account counts as income when you first earn it, and then counts as an asset every year after that. The money that you put into a Roth counts as income the first year, and then as nothing for any subsequent years, until the year that you pull it out, when it counts as income again.
I think I know the answer to this question, but I guess home equity loans count as untaxed income in the year that you take them?
Home equity loans are not income. For schools that count home equity a loan will reduce the equity in your home, and reduce your home based assets.
If you do not spend the proceeds of the loan and let them sit in your bank account they will count as an asset on the day you complete your FAFSA. That is why financial planners recommend getting a home equity line of credit instead of a loan if you are not going to be using the money all at once as soon as you get it.
A loan is never income (unless it is forgiven as bad debt, then it is income). You take out a home equity loan, it’s a loan. If it is sitting in a bank account on ‘filing day’, it’s an asset.
The balance is all protected. Profile do ask about the balances in these accounts…but it is suspected that this is just to see if retirement contributions are EXTREMELY high compared to income. No one really knows if these monies are used.
@SeekingPam the very LAST net price calculator MOST people should use to get an idea if aid is Harvard’s. First…getting accepted to Harvard is the first hurdle and with over 90% of applicants being rejected its not s slam dunk. Second…Harvard has extremely generous need based financial aid even for families with incomes in the $150,000 a year range. The VAST MAJORITY of colleges do not have generous aid like this.
It does most families NO GOOD to look at the Harvard net price calculator…unless their kid is actually applying to Harvard. The suggestion to look at the Harvard NPC is not particularly helpful if you aren’t applying there.
It seems that I struck a nerve with some suggesting that financial aid is “assistance,” lol
@BelknapPoint That actually is an interesting point about the income being counted twice. I never thought about. Of course, if you don’t withdraw IRA money in those years, then it won’t be counted twice. It seems like the money going into the IRA is counted no matter what. In other words, if you didn’t put it into the IRA, it’s still counted as income. If you don’t put the money into the IRA, any dividends/gains every year will be counted as income and the asset will be counted. If you put it into the IRA, then it’s only counted if withdrawn.
I think this point underscores the importance of good planning around college years. There are many other considerations (ie., when you sell an asset, grandparents giving gifts, etc) that can save people thousands of dollars if planned properly.
You asked for perspectives. I think you got some! 
With the amount of money at stake, and the importance of education, you’re bound to get some strong opinions, if not emotions.
People will do just about anything for their kids. We’ve all seen how insane people can get over something as ridiculous as a Little League game. Throw in a quarter of a million dollars and the financial success of your children and things get just a tad more crazy