<p>I sent an email to the financial aid office of DS' school, but am hoping someone here may know, since I think they start on break today, and this is something that needs an answer before next year! We have a lot of unpaid medical debt and are considering taking a $5000 distribution for a retirement account to pay it down. I am wondering what the effect of that will be, since we won't pay a a tax penalty, but I think it will show as income on our taxes. Any ideas what impact this may have?</p>
<p>It is going to have a huge impact on your EFC as it is income and that is what is hit the hardest for the EFC. Take a look at the EFC formula and you’ll see what I mean. You can end up with 40% of it going towards your EFC. What you can do is that you can send a copy of the the medical bills being paid along with the distribution date to show clearly what happened here, so that the fin aid director can exercise professional judgement if the rules of that office permit it that. But yes you will have to pay taxes on that distribution as extra income even without the tax penalty, and it will increase the EFC. That it will increase your tax liabilitie will mitigate a bit of the effect on EFC since taxes are subtracted out.</p>
<p>Can you borrow the money from your retirement account instead? IF so, you can repay at minimal levels until your DS is in his senior year and then take the distribution to pay the danged thing off, and that way it would not affect financial aid-unless you have another college student coming along.</p>
<p>Actually we will have 2 in school for 1 year! We won’t have a tuirtion free year until 2020. The financial aid office has been wonderful to work with, and I am sure they would look at the circumstances, but I would like to get confirmation before we make an irrivocable decision. I know we will need to pay taxes on the $5000, but that is a hit I am prepared to take.</p>
<p>I will look at the possibility of borrowing rather than taking the distribution, since I hadn’t really looked at that option. Thanks!</p>
<p>It could increase the parent contribution to EFC up to 47% of the 5k but the factors in that are complicated, your total AGI, how many in the family, taxes paid etc. Probably would be somewhat less. With 2 in college next year, if I’m reading that correctly, half of the increase would go to each student. You could work through the formula with and without the $5k added to AGI with this formula guide:</p>
<p><a href=“http://www.ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf[/url]”>http://www.ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf</a></p>
<p>Do work through the formula. That is $5K and not $50K makes the impact a bit less plus the split of the EFC due to two in college, not to mention the tax implication could make it not that big of a deal. Also with the proper documentation, the fin aid officer could make PJ that excludes it.</p>
<p>Some years ago, my friend’s husband got a large distribution upon being released from his job, which he promptly put into a business which would be the family’s sole source of income for the next several years. That year, they had two in college, and the schools refused to make exception which wiped out any chance of financial aid for their kids. They were getting about $30K in aid for the two of them at private colleges. So, the kids took a gap year, and got back to school the following year and resumed their education and got their financial aid, in fact and increase, because the pay from that company was not so great those early years. </p>
<p>In your case, it’s not as big of a deal, but if you can borrow it can take care of the issue entirely.</p>
<p>Yes, see if you can borrow against it rather than do a withdrawal. If you have to withdraw, then see if it’s better to do so after Jan 1.</p>
<p>Which year will you have two in college? Next fall?</p>
<p>What is your EFC with one in college?</p>
<p>No way to borrow from an IRA; the rules are different than the 401(k) rules.</p>
<p>Note also that the “for medical expenses” penalty exception really means “to the extent your medical expenses are deductible on Schedule A, or would have been if you itemized.” That’s a high hurdle, and higher for 2013 than it was in 2012. </p>
<p>Sent from my Nexus 7 using Tapatalk</p>
<p>
2013: Part of medical and dental expenses that is more 10% of the adjusted gross income.
2012: Part of medical and dental expenses that is more 7.5% of the adjusted gross income.</p>
<p>I took a retirement distribution to have a major home repair done that was kind of emergent and it really messed me up for FA for the last two years. I took the distribution in two parts to have it be in different tax years, not thinking it would screw up FA for two years also. Big mistake. </p>
<p>I didn’t realize the medical deduction minimum was going up that much. That one is going to hurt.</p>
<p>So if we are allowed a $12,000 deduction for medical expenses that we paid in 2013, and withdrew $10,000 from our Roth IRA accounts, we don’t have to report it on FAFSA? My husband is older than 59 1/2, so we don’t have to pay any penalties on the withdrawal.</p>
<p>No one said anything about the medical expense exception to the early withdrawal penalty affecting the FAFSA. Roth distributions still count as untaxed income for FAFSA.</p>
<p>Sent from my Nexus 7 using Tapatalk</p>
<p>If you withdraw $10,000, your income will go up by $10,000. If you can deduct $12000, your schedule A amount will go up $12,000. The net effect will be that your taxable income goes down $2000. On FAFSA, you usually report your AGI, which will be UP by $10,000.</p>
<p>
If you withdrew $10,000 in 2013, you would report it as untaxed income in 2014-2015 FAFSA. See <a href=“https://fafsa.ed.gov/fotw1314/help/faadef28.htm[/url]”>https://fafsa.ed.gov/fotw1314/help/faadef28.htm</a></p>
<p>Contact your school’s financial aid officer on your $12000 medical expenses, he or she could make appropriate adjustments on your financial aid. See [FinAid</a> | FinAid for Educators and FAAs | Professional Judgment](<a href=“http://www.finaid.org/educators/pj/]FinAid”>http://www.finaid.org/educators/pj/) and [FinAid</a> | Professional Judgment | Medical and Dental Expenses](<a href=“http://www.finaid.org/educators/pj/medical.phtml]FinAid”>http://www.finaid.org/educators/pj/medical.phtml)</p>
<p>Medical expenses come under Professional Judgement, which means the Financial Aid Director at each school makes the determination how this is handle. Your FAFSA EFC and PROFLIE are not going to reflect those expenses. You have to send a letter telling the FIn Aid director that you had $X in medical expenses that year, and what form they want the documentation backing up t hat statement. You will oftne need both the bills and the proof of payment and make it easy for the fin aid officer to match them up and see what happened, most of the time. You can explain that you took out $X from your HSA, 401K, IRA to pay towards those expenses, and request that it be taken into consideration. It is not a certainty that it will be handled that way, unfortunately. A lot of times the money is taken out of assets rather than off income, but by directing how the money was taken out of the qualified plans specifically for that purpose, hopefully some exception is made.</p>
<p>If at all possible, if one can borrow the amount, it is the preferable way to go, because there is no certainty that any given college will take it off income and income is what gets hit the hardest in the fin aid calculations.</p>
<p>Some of the NPCs ask about medical expenses, and you could certainly mention it when it comes down to the “anything else unique about your financial situation?” question.</p>
<p>All depends on what your agi is now and income…If your making over 100k and going to a 20k school your probably getting nothing anyway…but if your efc is zero and you go over the max agi figures you could lose pell and other state/school grants and be a disaster.</p>
<p>I suggest looking at last years income tax (if the figures will match this years income) and that will give you an idea.</p>
<p>Or wait until senior year after aid is calculated and withdraw the funds. Whatever you do don’t take the funds out in your base year (freshman year) wait until after Jan 1, 2014.<br>
Then you will have a whole year to plan…maybe you can shift some income for that year…</p>