<p>If a family pulls money out of a retirement account to pay for freshman year EFC, is that sum then counted as increased parental "income" for the following year, in determining the next year's EFC? Meaning the EFC would go up? Or would this be held harmless, since supposedly retirement accounts are not considered as assets subject to the EFC? Any help appreciated in understanding this.</p>
<p>I am not an accountant, or financial expert, but I believe that there would be a penalty for taking that money out of a retirement account, then it would also be taxable income, and it would get counted as income on your financial aid forms. I suppose you could write an explanation to the financial aid office that would show where the money came from, but I think that it would still count against you, giving a higher efc. I don't think it is a wise plan.</p>
<p>Sorry, all retirement plan distributions are reported as income, unless they are rolled over to another plan. FAFSA asks for Adjusted Gross Income (AGI) on line 35, and AGI includes IRA and pension distributions from 1040 lines 15a and 16a. </p>
<p>So taking money out of a qualified retirement plan early to pay college expenses is not a good idea. You pay taxes on it, you lose future tax free accumulations in your retirement account, and it increases your EFC. (One silver lining - the 10% penalty is waived if the distribution does not exceed education expense.)</p>
<p>Oh, I did not know about the penalty being waived. That is interesting, but I still would not touch that money, unless that was the only way my kids attend a community college. I would rather send my children to community college than touch retirement funds.</p>
<p>dt - I'm considering taking out money from retirement accounts for school expenses too (only amounts that are definitely beyond what I will need in retirement). I know it will count as income towards my EFC, but figured that since the accounts are from before tax dollars (they not Roth IRA's), that withdrawls will be taxed anyway. And since the penalty for early withdrawl is waved for educational needs, it seems like there's no difference than if I take out the money after turning 59 1/2. Am I missing something? This is important stuff, so I want to make sure I'm considering all of the factors. Thanks for any input.</p>
<p>E-mom, I don't think you are missing anything. You 1. lose out on future tax-deferred accumulation on the amount withdrawn, and 2. pay income taxes at your current rate, which if you are still working may be higher than your tax rate after retirement. Those are the downsides to raiding your IRA to pay for your spawn's edumacation.</p>
<p>Thanks dt. I do plan to retire within the next couple of years and would only withdrawl the money after that, so hopefully my tax rate will be lower. Spawn is correct, and I've been swimming upstream ever since!</p>
<p>Entomom---Your tax rate may or may not be lower in the year(s) you take money out, depending on how much you take out. Be sure to figure that in.</p>
<p>You're right MissouriGal, I'll have to keep track of that, particularly since my few tax deductions (morgage, etc.) are slowly dwindeling away. Hey, I just saw your thread on converting a calculator to RPN, I'm with you, that's the way I learned and I like it. Of course I'll never be able to convince my kids of that since they've been brought up on TI's.</p>