The simple answer is that there is no simple answer, because all schools calculate FA differently. I asked this same question to several different FA officers at the information sessions at schools we visited, often as I had to wait while my DH and our pups went on the campus tours. Some of the FA officers could not comprehend the questions, and asked that I email them, which I did, and even then the responses were sometimes inadequate, making me think they did not understand what we’re asking.
But overall, what became clear to me is that every school’s formula is different. Several schools do not add back in any 401K contributions when they figure available income. Other schools do consider that if you cut back on your contributions it will affect your tax bill, so it is not all available, but some don’t. What seemed most common to me was that schools seem to allow you to contribute up to 6%, as that is the most commonly matched amount. But again, it varies quite a bit. Some schools are keen to look for changes in your savings pattern - which is why they don’t want to see you’ve been contributing 15% this year but last year only 6%, to them that might not seem to fairly represent your whole picture. Not to suggest that retirement savings is a bad idea, they would usually just want an explanation.
The important thing to remember is that schools usually don’t expect that every additional dollar you earn will be available towards college costs, especially in situations where your income fluctuates. Their approach is that they want to treat all students fairly, and spread their resources around to the extent they are available.
It also seems evident to me that schools that are “harsh” on one aspect like retirement contributions, may not be so tough on other areas - like home equity. So it really is important to have the conversations with the schools so that you understand what you are facing, especially when income can change.
I hadn’t picked up on the asset/investment question until I had visited a few schools, and I heard another parent ask it - then I heard another ask it at a second school. What I learned was that while you cannot net out taxes from the value of investments, it is also fair to describe the problem in the supplemental information section, and the FA officers generally will understand. Their thinking is that if this asset has been saved for a long time for school and it comes time to liquidate it, they expect you will do so, and use the net proceeds to fund the expense. The school FA officers really do want to work with families to make sure they are being treated fairly.
When I realized that the investment question you raised was one that was commonly being asked by parents of HS sophomores and juniors, based on the answers being given, it made me realize that for some families with that type of investment, they may be better off liquidating it in the year before they apply to school, taking the tax hit and reducing available income, but maximizing their ability to get financial aid. At the very least, they should take the tax hit while it can still help them - if they wait until the student’s last year of college to liquidate that investment, they will have been assessed at the higher amount for all of the years that affected the FA calculations.
But practically, it seems that most families don’t have saved nearly enough for their pups - especially ours - but we were fortunate that our pups got accepted into CSS profile schools that had generous FA, so we’ve been able to make it work.