ok - makes sense. that’s why our funds which had been in the roth for years didnt count as assets - they had been deposited before years before.
yes that’s the gist. If you scroll up to a long post from MMRose, you’ll see the whole scheme laid out.
That scheme doesn’t work if the Roth contributions count against you in some way. I’ve established they don’t count against you as income, at least, so far.
Yes thee are deposit limits but as you can see from MMRose’s scheme, there are ways to maximize it with prior years.
If you don’t scroll up, keep in mind that drawing on the Roths will count as income in FA so to benefit the most you have to wait till late in the game, after the 2 -year look back (ie we submitted 2020 taxes for 2022-23 school year FA)
My understanding, which @politeperson also confirmed, is that contributions to a Roth are not reported to the colleges as untaxed income. Withdrawals from a Roth are reported as income if the distribution is taken before January of your student’s sophomore year. But that shouldn’t affect you, as you are planning on taking the distribution after that date.
As for the asset component, you need to include them as part of the current value of your retirement accounts and report that amount as it stands on the day you file the CSS Profile. However, CSS Profile schools say they do not use the value of those retirement accounts when calculating your need. So from that perspective, you are also fine.
However, as for colleges using the retirement information (and other information) to make decisions about how to distribute their own funds, I think @kelsmom can hopefully provide guidance on that. I think you are asking why do different colleges provide different FA packages when looking at the same CSS Profile data. What I understand is one reason is that not all colleges commit to meeting full need, so that can cause variance; another reason is that they can meet your need with varying components of loans and grants; and a third is that they can have their own individual way of assessing your home equity – from ignoring it completely, to assessing it as equal to a percentage of your income, or to using 100% of it.
Again, hoping kelsmom (and others) can weigh in on the actual mechanics of this.
1 Like
Nope, Roth’s don’t give a special “hide money from FAFSA” dispensation.
If I understand the scenario - UCDProf makes $140k per year. He will have to disclose that income on the FAFSA. He was not planning on using any of that income to contribute to his Roth (it is already allocated elsewhere).
Instead, he was planning on using money received from the cash-out refinance to fund the Roth IRA - completely ok as you just need sufficient income to contribute to a Roth, they don’t care where the money comes from (current income or other asset). That is additional assets other than his income. That is what he would be trying to ‘hide’ with the contribution.
If the Roth contribution came from his income and he had no other assets he was using to fund it, yes it wouldn’t be double counted as income and asset. But he (I believe) was planning on using the money from the cash-out refinance which is a separate asset from his income…does this make sense now?
1 Like
Oh I see, so there could basically be a 5.6% tax on the contributions in the form of potentially reduced aid.
Too bad the purpose IS actually to use if for college.
That doesn’t exactly ruin the scheme but it is a wrench. The advantage of low interest rate compared to PLUS loans starts to get eaten into.
Sorry, still not seeing your point.
When he takes out the loan and has the money in a bank account (let’s say 60k cash out), if he filled out the FA forms at that point, yes he’d report 60k in assets.
But he can make three Roth contributions from those funds before he needs to report assets in the next round of FA apps. Say 21k.
So he’ll report 39k in non-retirement assets and 21k in additional retirement assets on the next round of FA forms. The 21k won’t be treated as available for college.
2 Likes
I wasn’t asking why colleges do it differently, I was pointing out that they do, so we can’t always be sure what we are referring to here in our conversations. I think its best to assume that we are talking about what most CSS using colleges do, to our best knowledge.
So now the question is one of a general idea of whether the one-year 7k contribution (more like 20k including contributions to children, assuming 6k in wages each) would count as an asset by “most” CSS-using schools…
and I would likely have FA reduced by 5 % of that 20k?
1 Like
I think you mean “39k in available assets” not 39k in taxable income.
1 Like
Correct! Thank you for the heads up. I will edit the original to avoid confusion.
Your explanation makes sense. I never worked at a school that considered any information other than FAFSA information, so I would be guessing if I were to explain how schools might use the information from Profile. I know from experience on the parent side that schools have their own policies on how the Profile information is used … because every Profile school seemed to have a different parent contribution.
1 Like
i do know iras have a fee to maintain (at least mine do. i think $100/yr per ira).
i also think when i pulled money from my roth, it was counted on the fafsa as something for that year.
having a hard time seeing a clear cut benefit to most of these ideas as i’m thinking of this for ourselves. (again, similar income/efc; will have two kids in college together soon again, and refinanced house very recently so we have a pile of cash sitting there.)
I don’t think so. It’s a retirement asset which css profile schools claim is protected, even though they ask to have it reported.
You can get more info by running the net price calculators with and without an entry for retirement assets. The awards from the NPC should be identical for the two scenarios (per school), indicating that retirement assets are ignored.
1 Like
There is a choice when you fill out the form each year. We chose to start paying on one and the other we are paying the interest only…there has been no interest for a while on that one, so we focused on other bills.
You shouldn’t need to pay any fee for a Roth or any other IRA. Fidelity, Vanguard are good options.
Yes, distributions would be reported as untaxed income in the year taken as mentioned upthread. But if timed correctly, those would be made after the relevant tax year for the final round of FA forms.
2 Likes
Here is what the MyIntuition.org says on the question where they ask about retirement assets (see the bolded section at the bottom). As you probably know, MyIntuition is a site that provides a simplified FA assessment for a number of Profile collleges:
Do your parents have any retirement or pension plans? These include defined retirement plans, such as IRA, 401K, 403B, SRA, and the like.
Yes No
What is the value of those retirement plans? Note that the value of these plans is not included in any financial aid calculations. You may leave this answer blank. The purpose of asking is to distinguish between retirement savings and other savings that are not in a retirement account. We will ask for that information on the next screen.
2 Likes
Also, you haven’t mentioned a spouse, so it may be Roths for three and not for four. But if you do have a spouse, as far as I can tell, they can also have a Roth even if they don’t earn an income, if you file a joint return.
1 Like
we’ve already discussed how pulling the money counts as income, but not in the final years of college because it doesn’t show up in FA.
that is key to this idea.
since this situation is yours too-- try reading the whole thread (where it stays on topic) but don’t hesitate to keep asking questions here. This is your thread too now!
It is not a tax. The FAFSA formula will expect you to use 5.6% of the asset to pay for college. They may reduce aid but it is your money and not taxed. If you left it as equity in your house, they wouldn’t expect you to borrow it, but they will expect you to use it if you pull it out. Also, if you make $140k per year, you won’t qualify for a Pell grant. One or both of your children MAY qualify for a subsidized loan or a school may grant SEOG funds, but that’s up to each school.
No…the balance in the Roth account is not listed as a regular asset. On the CSS Profile, some schools do ask for the value of your retirement accounts, but these are not used in the financial aid equation.
1 Like
I want to clarify…if I am not correct, I am hoping others will chime in with references about how Roth balances are treated. And I might not be accurate. So…hoping others chime in.
I don’t believe this is accurate.
ETA…read this:
“ Do ROTH IRAs count as assets for FAFSA?
Retirement accounts aren’t counted as assets on the FAFSA”
@beebee3 please tell us where you see that the balance in a Roth is included as an asset at any time.