<p>While doing the Profile I was surprised they even asked about IRA's because I thought that IRA's were off-limits as far as EFC calculations. ... but they want your IRA info anyway.</p>
<p>Then I came across the real shocker, IRA distributions being considered as income!!!</p>
<p>This seems very unfair. Any distribution up to the amount of total contributions is simply a return of capital that was earned in past years, and in the case of the Roth IRA, was already subject to being taxed in previous years. How can this be considered current income ?!</p>
<p>This can't be true can it? Experts please pontificate! Thanks</p>
<p>Retirement accounts such as an IRA, 401(k), or 403(b) are not counted for the FAFSA. However, the CSS Profile digs much deeper into your finances, and yes does include them. Any money you have (in retirement accounts, under your bed in a shoe box, etc.) is fair game. It doesn’t matter whether the money has been taxed or not. It’s money that you’ve got somewhere.</p>
<p>Perhaps the lead sentence of my post obscured it’s main point, which is whether or not a Roth Ira distribution can/is/should be treated as income in the year of the distribution.</p>
<p>It makes no sense to me. The money was earned and subject to tax in previous years.</p>
<p>This is not a tax. In the school’s eyes it is a question of whether you can pay for school. If there are funds that you are starting to draw down for retirement then they believe that funding should be considered available for school as well.</p>
<p>I have no problem with Roth IRA distributions becoming part of my assets. The issue is whether they are considered part of my current income. That seems to me to be a totally untenable claim. So much so, that I’m trying to verify here whether in fact that is what is going to happen.</p>
<p>I don’t know…but I will say…for non-taxed retirement contributions…these are added back in as INCOME for financial aid purposes each year. BUT if you were to take a disbursement of these funds while your kiddo was in college, you would have to report this (again) as income for the year of the disbursement.</p>
<p>hmmm, non-taxed contributions is not my focus here, but that does seem strange … kind of a double-dipping form of accounting it seems.</p>
<p>If I understand correctly, distributions from a Roth IRA up to the level of contributions and assuming no contributions have been made in recent years, not sure exactly how many years, do not even have to be reported on tax returns. This makes sense because those contributions were subject to taxation in the year of the contribution. Someone in the zero tax bracket would not have actually been taxed on those contributions, but they were nevertheless subject to taxation.</p>
<p>What I am trying to clarify is whether distributions from a ROTH IRA of contributions made way in the past, will be considered current income by the CSS Profile and the college financial aid offices. Thanks to all contributing to this thread.</p>
<p>My best guess is that CSS Profile lumps the IRA distributions in with current taxable income because it saves them having to put another couple of lines in their forms somewhere. They know full well what is and isn’t taxable.</p>
<p>A Roth IRA is not reported as an asset on the FAFSA, but all distributions from a Roth IRA even a tax-free return of contributions are treated as income to the beneficiary on the subsequent years FAFSA. (This is also true of other non-reportable assets, such as 529 plans that are owned by someone other than the student or parent, qualified retirement plans, life insurance policies and annuities.) The income will be reported either as taxable income as part of the adjusted gross income (AGI) or as untaxed income on the FAFSA. Either way the income has the same impact on the students EFC.</p>
<p>If you have a choice about taking those distributions or not, run the net price calculators at the college websites both ways (with and without distributions) and see if there is a difference. My guess is that there won’t be because Profile views retirement finds as an asset that you can cash our of and/or borrow against.</p>
<p>Your post was in italics. Could you please tell me where it came from.</p>
<p>This seems terribly unfair and illogical.</p>
<p>ROTH IRA distributions of way in the past contributions is a return of capital. The proper treatment, it seems to me, is that a previously shielded asset, is now an un-shielded asset.</p>
<p>You are taking money out of a retirement account for current use. It is viewed as income for the year you take it out. The tax issue is totally separate.</p>
<p>“A Roth IRA is not reported as an asset on the FAFSA, but all distributions from a Roth IRA even a tax-free return of contributions are treated as income to the beneficiary on the subsequent years FAFSA. (This is also true of other non-reportable assets, such as 529 plans that are owned by someone other than the student or parent, qualified retirement plans, life insurance policies and annuities.) The income will be reported either as taxable income as part of the adjusted gross income (AGI) or as untaxed income on the FAFSA. Either way the income has the same impact on the students EFC.”</p>
<p>Your post was in italics. Could you please tell me where it came from?</p>
<p>Shizuka, what you think it should be doesn’t matter at all. The financial aid formulae could call it “Pink Flamingo” and the results would be the same. They make the rules. We play by them, or we send our kids to a school we can pay for out of pocket. It really is that simple.</p>
<p>It definitely makes sense to treat the distribution as income. The only reason to collect income information is to determine how much money was available to a family to spend in a given year. Alternatively, they could call it “money that the person has available to him/her to spend in the base year.” Doesn’t matter what it’s called … the point is, the money was available to the family and they could spend it as they wished … including for college tuition … in that year. It might be protected from paying taxes, but that is not the point.</p>
<p>You earned it and socked it away - legally sequestered it so that you would not use it then - to take possession of it later.</p>
<p>FAFSA doesn’t count it because it more closely follows IRS definitions of income.</p>
<p>But the PROFILE is designed to dig benenath those kinds of "hey, there’s a way I can take possession of more money without getting taxed on it " deals and looks at the real issue: how much money do you have available to spend on yourself . . . which includes college for kids.</p>
<p>As my step-dad used to say . . now you may pick up your TS card from he Chaplain.</p>
By this definition there is no reason to treat assets specially, and assess them at such a lower rate than income.</p>
<p>If the money was sitting in a brokerage account rather than an IRA, and you withdrew $X,0000 for whatever reason, it would not be considered income by the FAFSA or by the Profile (well, a fraction of it might if there was a capital gain).</p>
<p>Designating it as income or asset is completely arbitrary, as is the exclusion of assets in an official retirement vehicle such as a 401k vs. having your retirement assets in a regular brokerage account or real estate or whatever.</p>