<p>Get</a> savvy and you can boost college aid | OregonLive.com seems to suggest that you can "shelter" assets in a Roth IRA where they won't be considered assets for financial aid consideration, and where you can take out the principal for any purpose (according to the comments at least) or for education expenses without penalty after filing the FAFSA showing lower assets.</p>
<p>Is this really true?</p>
<p>Usually I'm not a fan of hiding assets, but we have a situation where we need to do some semi-major house repairs that cannot start until spring, but for a variety of complicated reasons we had to refinance our mortgage to take the cash out for the job last month, so the cash (about 25K) is going to be sitting in our bank account when we file this year's financial aid forms. So if we could indeed shelter some of it temporarily in a Roth, that would be helpful. Profile does ask for retirement assets as well, so they wouldn't be completely "hidden" but our retirement assets are not large for our income, so I don't think that would particularly be a red flag.</p>
<p>If my wife is self-employed and has a SEP IRA but has not contributed to it for 2011 or 2012, can she make a Roth contribution? I have a 401K plan through work, but my understanding is that I could also make Roth contributions for both 2011 and 2012 right now. We're both under 50.</p>
<p>Are you under the income limit for Roth IRA contributions? If you’re eligible, I can’t imagine why you aren’t funding the Roth IRA and leaving the money there.</p>
<p>I would check with your Tax Person for sure, but here is what I <em>think</em> about it.</p>
<p>It sounds like it would be a good way to take care of your situation. There are a few things though; the limit is $5000 per person unless you are old enough to do the ‘catch up’ thing which is an additional $1000 per person I think. </p>
<p>It is my understanding that in some cases, you can roll over part of your SEP while still keeping it active, meaning that possiblely you could also put some into your SEP, roll that over into your ROTH (there would be taxes dues at that point). Again, consult your tax person. </p>
<p>A few other issues for those thinking of this are that I <em>think</em> if it is a roll over from another plan or traditional IRA, there <em>may</em> be a ‘waiting period’ before you can take out the amount of original contribution. Also, on the tax forms, and FAFSA if I remember right, they want to count moneys taken out of a ROTH IRA as ‘income’. I have to do my taxes yet for this year and will double check this. I know in my daughters case (the student) she decide to withdraw part of her contribution ($3000 of graduation money) the SAME year she made the contribution and our Tax Man said to ignore the form (1099???) that she received because of that withdrawl, which we did and had no problem. </p>
<p>Usually we do our retirement savings via 401K (with huge matching, so that’s always fully funded) and regular IRA which gives the tax deduction for contributions. So that’s why we don’t normally max out a Roth. But with college payments we’re doing only the 401K this year.</p>
<p>There is a certain amount of parental non-IRA assets that don’t count towards your expected college contributions. It is “sheltered” from being counted. The reason is: families should have some money available for emergencies and unexpected changes in employment. The amount that is sheltered varies by a couple factors. I believe it is $40,000 to $50,000 for most families.</p>
<p>One thing that I have read, but have never tried so I can’t speak to the specific merits of the action, is that it is possible to overpay your IRA for the current tax year, and then to withdraw the overpayment before the end of the tax year. This seems just plain messy to me, but if it is possible to coordinated, it would get a piece of money out of an everyday account for a certain period of time.</p>
<p>If this is true it would make a short-term Roth contribution a really bad idea because income is “worse” than assets from a financial aid point of view. But that doesn’t make sense to me – the point is that a Roth is funded with income that was already taxed (and declared on the FAFSA). It would make sense if any <em>interest</em> withdrawn were treated as income, though, so hopefully that’s what you are thinking of.</p>
<p>There is actually nothing stopping you from putting as much as you want into an IRA. However, if you put in more than the $5000 or so annual contribution limit, it is considered an “excess contribution” and you have until the next April 15th to withdraw the excess contribution and any earnings on the excess, or you pay penalties (which are actually pretty harsh - 6% of the amount per year).</p>
<p>So you could park it in an IRA temporarily, and maybe keep to the exact letter of the FAFSA.</p>
<p>Keep in mind that even if the whole $25000 is above your asset protection allowance, FAFSA counts at most 5.6% of it, or $1400 in this case. Is lowering your EFC by $1400 going to make any difference for financial aid? Unless you are in Pell territory (probably not if you are about to spend $25K on renovations) or your kid gets into a meets-full-need school, it will likely make zero difference in the amount of non-loan aid you actually get.</p>
<p>Any “qualified” distribution from a Roth cannot occur tax free until 5 years after the Roth is established. Qualified can include - first home (10k max), Qualified college expenses (not room & board), after age 59.5, disablilty, etc. </p>
<p>I think your best bet is to report it - assuming it is under the protected assets under FAFSA rules. Provide an explanation on the CSS that this money was taken out during a recent refi in order to provide needed house maintenance.</p>
<p>^ The “contribution” portion of a Roth distribution is never penalized or taxed if there was no deduction taken when the contribution was made, regardless of when you withdraw it.</p>
<p>^^^^ That was my understanding also, that the <em>contribution</em> was never taxed when withdrawn. Out Tax Man thought it VERY odd that we received the form we did, especially since it was from one of the biggest Investment Firms there is. But, at the same time, he was more than comfortable just ignoring it when he saw our paper trail of the contribution and subsequent withdrawal all in the same year.</p>
<p>Be careful of rolling non-Roth IRA or SEP money retirement money into a Roth as the year you do that it’s counted as income. We did that years ago with large iRA’s and it was a disaster! Even though we were allowed to spread it over 4 years it pushed us up into some crazy income area where we have to pay AMT. Then, to add insult to injury, the market dropped (think 1999) and we ended up with half our money gone… and still owing taxes on the full rolled over amount.</p>
<p>Increasing income is definitely not what you want to do during the college years.</p>
<p>Otherwise, putting the max into Roths each year is a very good idea. You don’t have to add the contributions back in for FAFSA because they are already in your income, but you can take the contributions out at any time (not the earnings) and use them for retirement or even college expenses without it showing as income.</p>
<p>You can take the contributions out for anything, right? So the OP could take the contributions out for his home repairs? My best understanding (still rudimentary though) is that only the earnings have any restrictions on them.</p>
<p>It’s all rather confusing. I am pretty sure that the latter is correct according to [Publication</a> 590 (2011), Individual Retirement Arrangements (IRAs)](<a href=“http://www.irs.gov/publications/p590/ch02.html]Publication”>http://www.irs.gov/publications/p590/ch02.html) which states:
“You generally do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).”<br>
and later in the flowchart states that if a contribution is taken out within the first 5 years, “The portion of the distribution allocable to earnings may be subject to tax and it may be subject to the 10% additional tax.”</p>
<p>Assuming that the “it” in the above sentence refers to the portion allocable to earning, and not the entire distribution, I think this agrees with the interpretation that you can take out contributions whenever you choose. </p>
<p>We don’t have a “tax person” and I’m not sure who to contact to get an authoritative answer. I guess the IRS would be the final authority on such things.</p>
<p>The Investopedia article that NewEnglandMother posted agrees with the rule that contributions can be withdrawn any time (even before 5 years) without penalty. It is only when you want to withdraw your earnings (or rolled-over contributions) that it gets more complicated, according to that source.</p>
<p>So… for the record, in case anyone finds this thread in the future and wonders if this really works…</p>
<p>I looked into this further, and this idea definitely does not work as a short-term shelter. Tax-free distributions from a Roth IRA (or any other retirement fund) have to be reported as untaxed income on the FAFSA (and probably the Profile?) in the year they are distributed. This is very clear in the FAFSA instructions. Thus putting an asset into an IRA and withdrawing it while you still have FAFSAs to fill out changes an asset into income, which is the absolute last thing you want to do. (It could work for assets you want to set aside for longer, if you’d be withdrawing after your last financial aid forms have been filed.)</p>
<p>One could still do the trick of putting money in and taking it back out before the end of the tax year, in which case it counts as never having been put in, but that crosses my ethics line. (I’m not sure why one crosses my line and the other does not, but so it is.)</p>
<p>My oldest does go to a school that meets full need (using FAFSA and Profile) so this does matter for us. I’m not sure what the school uses as an asset protection level, so I’m not sure how much it will matter, but also since the school uses Profile and considers home equity, it’s not a new asset, it’s just in a different form from last year (and will be gone by next year). I may put a note on the profile explaining why there is a bunch of extra cash sitting around this year. I doubt it will change anything, but will at least not raise red flags why things changed as they did between last year and this, and then between this year and next.</p>