<p>My daughter is an incoming freshman this year at a FAFSA only school. For her HS graduation, her grandparents would like to give her a gift of money. They were thinking in terms of most likely doing an IRA for her to start her off on the right foot for financial planning/retirement. She does have enough earned income to qualify for an IRA.</p>
<p>What I'm not sure is how this will affect her FA in future years. She would not have to report it as income for tax purposes as an individual gift, put would it show up as an asset on next years FAFSA? Would it be better for them to "hold on to" the money for now and gift it to her after she is done with school?</p>
<p>This MIGHT be a recurring yearly thing. The one good thing about putting it in a IRA is that a person never has another opportunity to put money in if they "miss a year" - meaning that in future if you have enough money to do more than the max contribution, you cant say "oh yah, I would like to put this in for my 2009 contribution that I skipped".</p>
<p>I have also thought that if it was put in a ROTH IRA, that after she graduated (she is planning at least 6 years of school) that she would be eligible to withdraw any principal put in because it would be past the "5 year rule" for ROTHs.</p>
<p>The way it works with FAFSA is that they will not include IRA money. COlleges that use their own apps/PROFILE in addition can do whatever they please with the info. The best way I have heard for grandparents to help out with college costs without it being taken into account for financial aid is to lend the money to their grandchild and forgive the debt 4 years later. The other way is to have the money put in a 504 but owned by grandparent. Ask the financial aid offices of some of the schools that you think your D will be considering to find out what they do include in financial aid calculations for a more exact definition of impact that grandparents’ aid can make.</p>
<p>This is a good question, and I’m glad to see your family is already helping her prepare for her financial future. That being said, if you expect to get financial aid, assets of the student are assessed for your expected family contribution (EFC) at 20%. So, if she’s in school for, say 6 years, and assuming there’s no increase in value for the IRA, your EFC over 5 years of filing FAFSAs would be 5 X 20%, or 100% of the value put into the IRA. Does that sound like a good idea to you?</p>
<p>Your desire to start funding a Roth IRA is good, but it isn’t cost effective at this point. A much more complicated alternative (and one some planners abhor, while others promote) would be some sort of cash value life insurance. Another alternative might be a 529 plan to help pay for college (and in some states, give the grandparents a tax writeoff). Simplest is probably what you suggest - hold the money and gift it to her when FA is no longer an issue. It may allow her to make maximum contributions to her Roth in her early working years when income often isn’t much greater than expenses.</p>
<p>BTW, you can pull principle (the money you contributed) out of a Roth without waiting and without penalties. Hope this helps.</p>
<p>According to the instructions for Lines 91-93 (Parent’s Assets) on the “FAFSA On the WEB WORKSHEET”, Retirement Plans are excluded from reporting. For Lines 41-43 (Student’s Assets) it says: “See ‘Parent Asset Information’ on page 5 for instructions on reporting assets”. So, it can be presumed that Student Retirement Plans are excluded from reporting on the FAFSA.</p>
<p>If the assets are never reported, then it will not affect your EFC. However, IRA assets are reported on the CSS Profile. So, you will need to ask the school if they protect kids IRA’s or not.</p>
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<p>For a low income individual, the Roth IRA is preferred over the traditional IRA because distributions are not subject to income tax (currently). However, don’t go into an IRA with the expectation of withdrawing funds in the near future. It should be used for Retirement.</p>
This is incorrect on so many levels. But the bottom line is that IRA assets, whether Roth or regular, are not reported on FAFSA, so having retirement investments should not affect any financial aid calculations. And I think it is a very smart idea to fund an IRA now, when it has potentially 60 years to grow. She will be immensely grateful for it in the future.</p>
<p>Thanks for pointing out that IRAs are not counted for FAFSA purposes - that is correct. A big brain fart on my part :o - combining FAFSA and Profile instructions. Thus, a Roth would be an excellent place to put these dollars. And I second the idea of leaving the money in the account, as OperaDad mentioned and archiemom implied. It goes along with your mentioning about the opportunity to put money in for the year when earned. That said, she would be allowed to remove principle without penalty later, though she wouldn’t be able to “refill” the account later and put the withdrawn $$ back in.</p>
<p>archiemom, I don’t see where my statement is 'incorrect on so many levels." If the daughter has an asset in her name (not an IRA) which is assessed at 20% each year, yet she never touches it (the assumption for an IRA, but could also be a non-qualified asset in her name), instead using parental assets assessed at 5.6% to pay her school costs, the EFC would be 20% higher than if she didn’t have the asset for each of the 5 years . You wouldn’t want to do that, as it would essentially eat up the value of that asset.</p>
<p>I’m not disputing that 5.6% is less than 20%. But the 20% contribution is calculated and assessed each year, so it never reduces the asset to zero.</p>
<p>I took a look at the FAFSA “rules” and it looks like indeed that the IRA would not count as per the statement that was mentioned referring. to treat it like parents IRA’s (meaning not counted in EFC). I will double check with the FA office where she will be attending. </p>
<p>One of the reasons that the grandparents would like to see this money go into a “retirement” account instead of paying directly for school expenses is it is coming from their IRA accounts (they are old enough to withdrawn penalty free), so they are looking at it as a form of “inheritance” I think. Just passing it on now, while it can still grow and avoid some possible estate tax issues</p>
<p>As to the comment about that IRA’s shouldn’t be used for money that needs to be taken out in the future but before retirement. I completely understand what you are saying for most cases, but I see it slightly differently… for example, I take part in my employer plans to take adavntage of the employer “match”. This is 6% me and 3% employer = 9%. Lets say that I only have $5000 more (the current IRA limit I believe) to put towards BOTH retirement and general shorter term savings needs. I could but $2500 in a general savings account and $2500 into and IRA account. BUT, why not put it all into a ROTH IRA, and that way if you need the part back that you would have put into the savings account (just the principal put in - NOT the interest) you can still get it with no penalty. IF you dont ever need it, it can grow for retirement purposes and you wont have missed your opportunity to make “full” IRA contribution for that year.</p>
<p>I do agree that IF you have plenty to fund both an IRA to the max and a separate saving account for shorter term needs, that would be the ideal situation.</p>
<p>Wouldn’t this ^ be avoided if grandparents gifted it to us (parents) and we put it into an IRA for the student? My understanding is that a parent can support a student all they want to and it does not have to be counted by the student as “unearned” or “other” income.</p>
<p>With retirement funds, you need to absolutely think “this is for retirement, and I will NEVER use it before then”. Once you start mixing retirement and savings, then don’t count on it being there for retirement. If you don’t need your Roth for retirement, then fine, but don’t plan for retirement as if it were there.</p>
<p>Savings is pretty straight forward and not that mysterious. You need to save for:</p>
<p>Emergency fund: 6-18 months of expenses depending upon how difficult it will be to find a new job.
Replacement: Car, home repairs, etc.
Planned expenditures: College, vacation, toys, wedding, etc.
Misc: Things you didn’t plan for (only need a few thousand for this)</p>
<p>Other than Emergency Fund and Misc, you are going to spend that money, so there is no “IF you dont ever need it”. The money also needs to be invested very conservatively, so you are not missing out on much tax benefits (income is low, so taxes are low).</p>
<p>The problem comes in when you don’t save enough, and use “deposit to IRA” as an excuse not to save enough. If you are not saving enough, then you will eventually tap the money. If you are saving enough, then you don’t need the “If”.</p>