Eligible retirement plan accounts, such as a 401 (k), Roth 401 (k), IRA, Roth IRA, pension, qualifying annuity, SEP, SIMPLE, or Keogh plan, are not reported as assets on the FAFSA. If you're like many parents, you may be wondering if saving too much for college will lower your child's chances of receiving federal financial aid as needed. Here's an overview of how different types of assets fit into the financial aid equation. Retirement accounts (e.g., be careful when withdrawing money from your IRA (or any retirement account) to pay for college.
While tax law allows you to withdraw funds without penalty from a traditional or Roth IRA to pay for qualified college expenses, doing so may jeopardize financial aid in a future year. The entirety of the withdrawal, including principal and profits, is counted as income in a future year's application for aid. The equity of your main home, a family business, insurance policies and annuities are also excluded from your assets when determining the EFC. The assets owned by the student translate into a further reduction in financial aid.
The accounts of the Uniform Giving to Children Act and the Uniform Transfer to Children Act are counted as student assets. In addition, they can increase the student's included income to the extent that interest, dividends, or capital gains are reported on the student's income tax return. Often, the income tax benefit of reserving investment assets in the name of a child is offset by reducing the child's financial aid package. This material has been provided for general information purposes only and does not constitute tax or legal advice.
While we do our best to ensure that our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer. Did you transfer funds from one qualifying retirement plan to another last year? Don't report this cumulative IRA on your FAFSA application. I read your article about creating an IRA for a child and was wondering how a college student's Roth IRA is accounted for financial aid purposes. While you are allowed to withdraw money from your IRA without penalty if you use it for educational purposes, these funds will affect your financial aid.
Distributions from a Roth IRA should be listed as non-taxable income on your FAFSA or as taxed income if you've had the account for less than five years. Therefore, increasing your IRA contributions won't affect your income so you may qualify for more help.