<p>Background:
My son will graduate from high school in 2012. Our financial aid application will be based upon the 2011 tax year. We are considering converting a traditional IRA to a Roth IRA in 2010. This will show as large jump income in 2010. We also would like to pay the taxes over 2010 and 2011.
Question:
Will this 2010 Roth IRA conversion effect our 2012 financial aid application?</p>
<p>Difficult to say. Your 2012 FAFSA application will be based on your 2011 tax return. Anything in that 2011 tax return may affect your EFC. A roth conversion would normally increase the AGI in the year of the conversion and the AGI is what is reported on FAFSA but I am not sure how you will have to report the conversion when you are spreading the tax. Have they put out the rules yet? If you have to report it in part as income in the 2011 return then it will affect the EFC.</p>
<p>There is currently no way on FAFSA of reporting that the AGI is inflated because of a roth conversion. But a roth conversion is something a school is allowed to make a special circumstances adjustment for. However this is at the discretion of th FA officer at each school so you would need to check with them.</p>
<p>It is up to each school how they treat it, but the standard seems to be that they subtract the conversion $ from your EFC formula. I called the school for next fall before converting this year when the market was low. They said they always do it, but we will need to submit a form pointing it out.</p>
<p>My S is graduating in May 2011 and we will probably have the same IRA conversion issues. So far I have asked this question to the FA folks at two of the schools he is applying to. I’m not quite sure that either really understood what I was saying. One said I could appeal any FA decision and supply this info. </p>
<p>If possible, I plan to create two tax returns. One showing the conversion and one without it. Then I’ll complete two FAFSA forms. I’ll then write a cover letter explaining that the conversion is not real income. Hopefully this will work. I can’t imagine we will be the only ones doing this.</p>
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<p>Yes…this is how you ask for a special circumtances consideration. </p>
<p>BUT you do need to know something…the ONLY tax return the schools will be interested in seeing is the one you actually FILE with the IRS…your “other one” will not matter a bit. You need to provide the documentation of the Roth IRA AND the materials that show the conversion of THAT money into a regular IRA. THAT is what the schools will want to see, not a contrived tax return that you did not actually file. The school will want the real documentation that this transaction occurred.</p>
<p>Some schools will treat this as a special circumstance and make an adjustment to your EFC based on this information. </p>
<p>Remember, however, special circumstances considerations are at the discretion of EACH school. Some do them and some don’t. AND each special circumstances consideration is treated on a case by case basis.</p>
<p>I’ve been considering converting this year, but with a rising sr, that means her fr yr FA would be based a Roth inflated AGI. I wouldn’t mind so much if she was already in college and I was able to check and see what the schools policy was, but not knowing which of 10 or so schools she’ll be attending makes it pretty dicey.</p>
<p>We are in the college parent’s Catch-22.
- I will be 59 in September of 2010.
- If I convert a traditional IRA to a Roth this year there is an early withdraw penalty.
- If I convert after April 2011 there is no early withdraw penalty, however that money is considered income for the 2011 tax return and the 2012 FAFSA.
- Our son will graduate from high school in 2012</p>
<p>For now I do not plan to convert to a Roth until our son is in college.</p>
<p>
Why would there be an early withdrawal penalty? Or are you planning to use some of the money in the IRA to pay the taxes?</p>
<p>OP…why are you converting to a Roth? Why not just leave this in a traditional IRA?</p>
<p>Notrich …if the OP converts THIS year, I don’t believe they will be 59 1/2.</p>
<p>Do you need the cash from the IRA? I don’t understand why you don’t just wait until you are past 59 1/2 AND you don’t have to report it on your FAFSA (the end of his junior year of college as there will be no more FAFSA’s after that).</p>
<p>My husband just turned 59 1/2 and we have no plans on converting, and he is already retired! It would be financially unwise due to financial aid packages, and we will need that money to live on once the kids are gone.</p>
<p>It is sometimes advantageous to convert traditional IRAs to Roths if you feel the tax rate will be higher when you withdraw the funds in the future than they are when you convert. Also for those who may be passing Roths on to their heirs, Roths have significant benefits over traditional IRAs. In addition, you are not required to start withdrawing funds from a Roth by age 70 1/2 as you are in a traditional IRA which also has a specific required minimum distribution (RMD). I’m not a tax expert, but those are the basics. There are plenty of articles on the Internet explaining it better.</p>
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Doesn’t matter. Roth conversion is taxable, but not subject to the penalty, unless some of it is used to pay the tax. </p>
<p>Thinksnow: go ahead and convert in 2010. There will be no early withdrawal penalty. I would also suggest paynig the tax on the 2010 return since nobody knows exactly how FAFSA will treat it if you defer the tax. </p>
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You don’t get cash from an IRA conversion. You are converting it from a traditional IRA to a Roth.</p>
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<p>Thank you…I honestly didn’t know that!</p>
<p>I think if I were the OP, I would wait unless there is some need to convert sooner than later.</p>
<p>Reasons to convert now:</p>
<p>Tax rates are the lowest they have been in a long time and destined to rise.
Market is down. All future earnings will be tax free.
You never know when they will change the rules. </p>
<p>But everybody’s situation is different and should be looked at individually.</p>
<p>Good information! </p>
<p>As I said earlier, D2 will graduate HS in 2011, so this is the year her fr year FA will be based on. I’m thinking of NOT converting as I don’t know where she will attend and therefore won’t know the consequences of that extra income. The only possibility might be if she is lucky enough to get into somewhere EA and the school policy was to overlook IRA conversion income.</p>
<p>There is an answer-the college can recalculate your return subtracting your Roth conversion. Refer to this link which you can send to your financial aid officer:
<a href=“http://www.ifap.ed.gov/sfahandbooks/attachments/0708AVGCh5.pdf[/url]”>http://www.ifap.ed.gov/sfahandbooks/attachments/0708AVGCh5.pdf</a>
The particular item is listed on the bottom of page four in this government publication.</p>
<p>^Thanks, that’s interesting to see coming from the OIG. However, it looks like it’s only for Federal funds via FAFSA, I’m assuming that each Profile school can and will use their own professional judgment concerning conversions.</p>
<p>dbruening - What a great link. It will be great to be able to quote a gov’t document when trying to get the fin aid folks to adjust the EFC for the Roth conversion. There is no logic in counting it as income, but I guess logic isn’t always considered. </p>
<p>Has anyone tested this with their 2009-2010 FAFSA form?</p>
<p>I am totally new here and as my user name shows, I am confused for now! My dau is a jr in college and I am going thru a divorce. My settlement is a lump sum rolled into an IRA. How will that work for fafsa?</p>
<p>
Retirement assets are not counted when calculating the FAFSA EFC.</p>