Roth IRA distribution treatment

Paying for College
21

<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>

<p>You’re probably right. The only difference is how accessible it is. It does use up assets ( or income) to have to refinance a house in order to access equity.
I believe you also would pay penalties if you took money out of a 401K to pay tuition.</p>

<p>FAFSA is relatively easy to understand- but PROFILE, since each school uses the info differently & since you aren’t really given a PROFILE EFC, it is more difficult to figure out what how the expectations vary.</p>

22

<p>I haven’t actually done a Profile yet, but it seems like it could be double-counting. The school is already aware of the IRA, and presumably charges it at some percentage for assets. Then the owner draws down part of the asset, and the school charges it again at some higher percentage for current income. Do they handle regular savings the same way? Charge you for having it, and again for using it?</p>

<p>The Kantrowitz quote was about non-reportable assets. Is the Profile school not counting the IRA asset in EFC? If not, then it makes sense to consider the distribution.</p>

23

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Stuff gets double-counted all the time.</p>

<p>For example: you make $100K during the year, and save $10K in a savings account. The money in the saving account gets assessed once when it came in as income, and a second time as an asset.</p>

<p>For example: You have $100K of stock in your account that you paid $50K for. You sell it for a $50K profit, and put the $100K in proceeds in your savings account. You get assessed on the $50K of capital gains as income, and the $100K as assets, even though all you did was convert it from stock to cash.</p>

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The Profile asks for how much you have in retirement savings, but no one knows what exactly they do with it. My guess (which is just a guess) is that they make a judgment about whether you have “too much” in retirement assets (based on who knows what), and if you do they will count part of it as your usable assets.</p>

24

<p>It seems punitive if your parent is older. Considering my father will be 70 when I am applying to college he will be forced to take distributions. Given that his IRA is over $850,000, and his life expectancy is 75. His income will be substantially higher. It seems that college will eat up all of his retirement assets. Is this correct?</p>

25

<p>No the college will not eat up you dads retirement account. The amount of income, the money he draws, will be counted as Income just like any one else. The amount in his retirement account will not matter not be viewed as an asset. Only the annual distributions are counted as income. And remember no one is assessed their WHOLE income when determining the family contribution.</p>

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<p>^ Your father’s life expectancy at age 70 is 13+ years, not 5 years. But minimum distribution is based on the IRS’s tables, not standard life expectancy tables, which at age 70 is around 27 years.</p>

<p>So he will only have to take out around $32,000/year.</p>

<p>If your mother is more than 10 years younger than your father, the minimum payout is even less.</p>

27

<p>Regarding the OP, I found this from the same Mark K:</p>

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<p>If you are taking a one time distribution rather than reporting ongoing income, you can ask for a professional judgment for FAFSA schools indicating it is a one time thing.</p>

28

<p>First of all the financial aid process is not entirely fair. There are a lot of flaws in it. There are some niches where one can take advantage and some pitfalls to avoid as one will get slammed harder than one should, given the way things logically should work.</p>

<p>The system was set up before there were Roths, so when Roths came into being, they were just dealt with without a whole lot of analysis. That’s my feeling about it. The fact of the matter is that FAFSA does not include ANY qualifed pension or benefit plan (such as HSA, etc) as assets. You could have a billion bucks tucked away in such accounts and it doesn’t matter. But the minute you take a dime out of those accounts, forget the fact that you didn’t make anything on the money sitting in there, that you may have even LOST money in those investments, those funds are counted as income. They are income because they were not counted as assets and/or would not have been counted as assets so they are money from “somewhere”, “anywhere” and any money from those places gets counted as income.</p>

<p>So enter PROFILE schools. They don’t want to be too far off from FAFSA. But they don’t want to give a lot of their own funds. Those schools using PROFILE feel that if you have billions in your home equity and/or your 401K or hidden in some other qualified plan, they should know about it and in some cases, get a piece of it. There is an outright formula for home equity for most PROFILE schools and they are usually willing to give it to you, but for pensions, they are more secretive and often will just say that it depends on the entire financial picture. That you can’t be sued for pension assets, can’t lose them for being a bad boy/girl, but you can lose 'em for college payments. Yep, some PROFILE schools will tag them as assets. How much you have to have, under what circumstance and how they are assessed are all under Professional Judgment in most cases, though a few schools may well just hit up the whole bundle as regular old assets. I can see why the funds should be not always be sacrosanct. Really not fair to those who are at the same and lesser income and other asset levels and don’t have qualified plans. Also not fair if someone has a big fat pension being held by a company and therefore not reportable on PROFILE, but that is a whole other issue. </p>

<p>So, as it stands now, yes, if you take out money from a Roth IRA or any IRA or 401k type plan, it is counted as income as are distributions from formal company pension plans. Pure income. Never mind that the ROTH funds were taxed before you put them in the account, never mind that the company money never was your income whereas 401K and IRAs are. THey are all put on the same boat because no one wants to start differentiating among all of the weird things out there and the subtle differences among them. They are all income and they are so even if the school counted them in part or full as assets as well. Unfair and inconsistent, yes. aBut that’s the way it goes.</p>

<p>So the best way to go if you need more funds and are getting some financial aid and don’t want to lose it by jacking up your income with ROTH or other plan withdrawals is to borrow against Plans if you can or take out a PLUS or other loan, maybe a HELOC, and it back out of the ROTH or IRA or 401K if that was the direct way you wanted to pay those danged college costs to begin with if it weren’t for the hit on income you would have taken.</p>

29

<p>I want share an anecdote that I knew of. A friend of mine learned with the kids from his first marriage how the financial aid system worked. Learned it well even as he and his kids got a big fat zero in terms of any grants or subsidies and he could get better deals on loans himself, thank you. With his second set of kids, he was older and wiser and was able to plan in advance and did milk the system by taking advantage of the loopholes in it. By not touching any of his pension money, and living on loans, and having funds mostly in qualified funds as well as distribuing assets early to his first set of kids, he was able to benefit from some financial aid for his second set. He did not draw on his pensions until they were out of college and repaid his loans according. It wasn’t a perfectly free ride, but he was able to get some extras by planning ahead and knowing how fin aid worked.</p>

30

<p>You can request that a school count the money as an asset, rather than income. They will most likely feel the need to account for it somehow … after all, had it been in a bank account rather than in retirement, it would have been counted as an asset. Just know that not all schools will do that, as it is Professional Judgment. In addition, it may very well not make any difference in terms of aid (depending on your financial situation).</p>

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<p>Deleted - meant to post this on a recent, not old thread.</p>