Hello Hive Mind, I have a question that certainly has been asked before but is specific enough that it is difficult to find the exact answer so asking begins:
I am a divorced mom aged 53 with one child going off to college with great funding from grants, another that bombed out of university so will be staying home and going to community college and has lost the entitlement to grants until he can demonstrate a better GPA, and I am also going to graduate school in the fall. My income and spousal support still leave me a bit below the poverty line. I am not eligible for the Pell grants that my children benefit from but am hoping for a TA or other financial aid from the University.
I currently own my home and the opportunity came up to sell. Affording it has been a stretch for me and I am ready to downsize and no longer have to maintain it. I expect to gain about 70K on the sale of the home and don’t know how to best protect my youngest’s financial aid while still providing a home for myself and kids that better suits our current situation. Do I need to reinvest that money in another primary residence? I’d prefer to rent for a a couple of years until we are through with this transition but I don’t want to lose the precious little nest egg I have.
Are you saying that the net proceeds will be $70k?
Would you qualify for the simplified needs test?
Is your child’s school FAFSA only?
Thank you for responding.
Yes to 70K net proceeds,
no to simplified needs,
yes to FAFSA only.
When will the youngest graduate?
Try the College Board EFC calculator with $70k in additional assets to see how much the Pell would decrease.
Then try that new EFC in your kid’s school’s NPC to see how it affects grants from state or school.
Surprising negligible difference. The thing I find frustrating is that a married couple at my age can shield about 50K in in asset protection and I get 13K as single.
My thoughts are to sell the house, put 6500 in my IRA, clear out all short term debt, spend a little on fun and let the rest sit somewhere. My main concern is that I be able to pay off my college loans when I graduate in three years or to purchase a home again when I am ready and be able to survive the unexpected emergencies along the way. I just don’t want to damage my kid’s financial resources.
Contributing to your IRA won’t help much, as those amounts will be added back into your income.
Will you have a capital gain on the house, that will show up in income? That will hurt you more than the extra assets, and you might have to ask for special consideration and explain it. The assets are easier to deal with than income; paying off credit card and other “not counted” debt is good. Also buying personal property (car, boat, tractor, furniture) - but be careful, that stuff depreciates and is not a good investment, so only get it if you need it anyway. Probably putting that money into another primary residence before the next FAFSA filing would be a good idea, since it would be home equity not counted on the FAFSA. But that doesn’t work with your non-FA goals.
Do you have a business? If so there are some other possibilities.
^^It’s her personal residence, thus presumably the IRC Section 121 exclusion applies so no capital gain on the tax return.
Since she is near poverty level, she would put the $6500 in her Roth IRA, so there is nothing to add back for FAFSA.
There is no capital gain on personal residences under $500k (?) anymore. Any proceeds will just be an asset on the FAFSA if OP still has it when child files FAFSA. If you have an employer with a 401k, you could put a lot more of your income into an account. It will be added back in to income the first year, but after that retirement accounts aren’t counted, just new contribution.
Isn’t there a dollar annual limit on retirement contributions? I believe $70,000 exceeds that amount.
Plus, I thought you could not contribute in excess of what your income is. If this OP is at the poverty level, her income might also be a factor in how much she could contribute to a retirement account in one year.
There is a maximum level and she cannot contribute $70000 in one year. Max is $23000 for someone over 50, or up to her salary. She said she didn’t qualify for Simple asset treatment, so she makes over $50k. I was suggesting that if her employer has a 401k plan, she contribute the max and use the proceeds to make up for the amount deducted from her paychecks. It might even get her to below the $50k AGI and thus qualify for simple asset treatment. It would be added back into FAFSA for total income for the year, but you still are under simple asset treatment so any of the $70k left in her band accounts wouldn’t be considered an asset.
For example, if she makes $60k per year, but contributes $20k to the 401k, her AGI would be $40k and she’d qualify for simple asset treatment. Her paycheck would dip, so she could use some of the proceeds of the home sale for living expenses. Her FAFSA income would still be $60k because FAFSA would add back in the $20k in the 401k, but her taxable income is still only $40k.
This also works if you are above the limit for the AOTC. You can bring your AGI below $80k and qualify for the credit by contributing to a 401k or IRA, but the IRA limit is much lower at only $6500.
^^Oh! I always wondered about that - if you could use 401k or deductible IRA contributions to get below the $50k AGI. So those don’t have to be added back then?
So OP must make over $50k but she says she is at the poverty line? I wonder what the poverty line is, then.
I wondered that as well…since the average family income in this country is about $50,000 a year.
IRA’s and 401k’s do have to be added back in on FAFSA, but it did not trigger adding the assets to the FAFSA. I guess it is like an ‘above the line’ credit or a ‘below the line’ deduction or credit. On taxes, of course, those amounts aren’t added back and a MAGI under $80k gets you the full eligibility for the AOTC.
$24,000 max for 50+ in ty 2015.
You can have low income but not qualify for the simplified needs test if you have a business or rental, property and therefore must file 1040 (not 1040A or EZ). But if she’s really poor she might be eligible for food stamps or another needs-based program and qualify that way.
@Sweetbeet, to clarify…the qualifiers for simplified needs are meeting the income threshold income and ONE of the following…note, not all…just ONE:
- Being eligible to file a 1040 A or 1040 EZ
OR
- Qualifying for a means tested benefit like SNAP, free or reduced lunch, etc.
OR
- Being a dislocated worker.
This got away from me! I am self employed so no 401K and no EZ. I make significantly lower than 50K a year and that includes spousal support. There is not any support from the kid’s dad. There will not be any Capital Gains tax on the house.
So questions: My contributions to my Traditional IRA are limited to 6500 at my age. If I move 6500 into my IRA is this still counted as an asset by FAFSA?
My kids are all set for the upcoming school year. If I am able to protect the money in an IRA can I make a contribution from the proceeds this year and then again in 2016 (for a total of 13000) before I file FAFSA for next year?
Not eligible for food stamps.
I appreciate these thoughtful responses!
And I do have an earned income of about 18000. sigh
Josie, what is your total AGI? Do you qualify for any means tested benefits…free or reduced lunch perhaps?