Retirement Savings And Fafsa: What You Need To Know

Retirement savings are not reported on the FAFSA, but they are reported on the CSS Profile, which is used by some schools to award grants and scholarships. This means that retirement savings may not affect your financial aid offer at some schools, but they could at others. The FAFSA does not consider retirement accounts as reportable assets, and funds in recognised retirement plans such as 401(k) plans, pension funds, and annuities do not need to be disclosed. However, contributions to and withdrawals from these accounts must be reported on the FAFSA as income.

Retirement savings are not reported on the FAFSA

The FAFSA does not ask about the value of retirement accounts, such as traditional and Roth IRAs, 401(k) plans, and pensions. However, the untaxed contributions to and withdrawals from these accounts must be reported on the FAFSA as income. Qualified retirement accounts include an IRA, 401(k), 403(b), or pension plan.

The net worth of the family home, including one that is located on a family farm, is also not reported as an asset on the FAFSA. However, if the family has recently sold their home, the net proceeds of the sale must be reported as an asset, even if the money is intended to purchase a new home.

If your college only requires you to complete the FAFSA, your retirement savings will not affect your financial aid at all. However, if your school also requires you to complete the CSS Profile, retirement funds can start to affect financial aid. Schools can use the CSS Profile to award their own grants and scholarships, and they can ask more detailed questions about a family's finances, including retirement savings.

Retirement savings are reported on the CSS Profile

Retirement savings are not reported on the FAFSA. This includes any recognised retirement plans such as 401(k) plans, pension funds, and annuities. However, if your college or university requires you to complete the CSS Profile in addition to the FAFSA, your retirement savings will be reported. This is because the CSS Profile is used by schools to award their own grants and scholarships, and they can ask more detailed questions about a family's finances, including retirement savings.

The CSS Profile will ask you to list the value of all your retirement accounts. However, most colleges and universities will not include the value of your retirement accounts when calculating your financial aid eligibility. They will only glance at this information. But it is within the rights of a school to include these numbers when calculating your financial aid package, so it is best to check with the school's financial aid office.

If your college only requires you to complete the FAFSA, your retirement savings will not affect your financial aid at all. This is because the FAFSA does not consider retirement accounts as reportable assets, so the funds do not affect federal financial aid packages.

Retirement accounts are not counted when determining the EFC

The Free Application for Federal Student Aid (FAFSA) is used to gather information for the EFC calculation. On the FAFSA, students and parents are required to report the net worth of their assets. However, retirement plans, such as 401(k)s, IRAs, pensions, and annuities, are specifically exempted from reporting. This means that funds in qualified retirement accounts do not need to be disclosed on the FAFSA and will not be included in the EFC calculation.

It is important to note that while the value of retirement accounts is not considered, any untaxed contributions to or withdrawals from these accounts must be reported on the FAFSA as income. Additionally, if retirement funds are held in non-traditional savings accounts, such as a regular savings account, they will need to be reported as assets on the FAFSA.

The exclusion of retirement accounts from the EFC calculation recognizes that these funds are intended for retirement and should not be factored into the expected contribution for education expenses. By not including retirement savings, the EFC formula aims to provide a more accurate assessment of a family's financial strength and ability to contribute to college costs.

Furthermore, the treatment of retirement accounts may vary if a college or university requires an additional financial aid application, such as the CSS Profile. In such cases, retirement savings could potentially impact financial aid eligibility, as these applications may consider a broader range of assets. Therefore, it is advisable to review the specific requirements and guidelines of the institutions to which the student is applying.

Untaxed contributions to and withdrawals from retirement accounts must be reported on the FAFSA

Retirement savings are not reported on the FAFSA. This includes any recognised retirement plans such as 401(k) plans, pension funds, and annuities. However, if your retirement funds are not in a traditional plan, you will have to report them in the asset section of the FAFSA. For example, if you have a savings account for retirement, you will need to declare this on the FAFSA.

The FAFSA does not ask about the value of retirement accounts, but the untaxed contributions to and withdrawals from these accounts must be reported on the FAFSA as income. This includes voluntary contributions to qualified retirement plans, such as pre-tax contributions to a 401(k). This prevents families from reducing their income by increasing contributions to their retirement plans. For example, if you increase your contributions to your pension fund to reduce your taxable income, you will still need to declare this on the FAFSA.

Involuntary contributions to retirement plans, such as state employee retirement systems, are not reported as untaxed income on the FAFSA. However, contributions by federal employees to the Thrift Savings Plan (TSP) are voluntary and therefore must be reported as untaxed income on the FAFSA.

Distributions from a retirement plan are also reported as untaxed income on the FAFSA to the extent not already included in adjusted gross income (AGI). For example, a tax-free return of contributions from a Roth IRA is reported as untaxed income on the FAFSA.

Consult a financial advisor before moving retirement savings around

When it comes to retirement savings and the FAFSA, it's important to understand that not all retirement plans are treated equally. While recognised retirement plans such as 401(k)s, pension funds, and annuities are not reported on the FAFSA, non-traditional retirement savings, such as money in a savings account, are reported as assets. This distinction is crucial, as it can significantly impact the amount of financial aid one receives.

Before making any decisions regarding your retirement savings and the FAFSA, it is highly advisable to consult a financial advisor. They can provide valuable insights and guidance tailored to your specific circumstances. Here are some reasons why consulting a financial advisor beforehand is essential:

• Expert Knowledge: Financial advisors are well-versed in the intricacies of retirement savings and the FAFSA. They can help you navigate the complex rules and requirements, ensuring you don't inadvertently affect your financial aid eligibility.
• Strategic Planning: Advisors can assist in structuring your retirement savings in the most advantageous way. They can advise on which types of retirement plans to utilise, ensuring your savings are optimally positioned for both the present and future.
• Tax Implications: Retirement savings and investments can have tax implications, and a financial advisor can help you navigate them. They can explain how contributions and distributions from retirement plans may be reported as untaxed income on the FAFSA, helping you make informed decisions.
• Avoiding Pitfalls: Moving retirement savings around without proper guidance can lead to costly mistakes. A financial advisor can help you avoid pitfalls such as unnecessary taxes, fees, or penalties that could arise from hasty or uninformed decisions.
• Personalised Advice: Every individual's situation is unique. A financial advisor will take the time to understand your specific circumstances, goals, and needs. They can provide tailored advice, ensuring your retirement savings strategies align with your overall financial plan.
• Long-Term Benefits: Consulting a financial advisor before moving retirement savings around can have positive long-term effects. They can help you make decisions that not only benefit your immediate financial aid situation but also contribute to your retirement goals and overall financial health.

In summary, consulting a financial advisor before making any moves with your retirement savings is a prudent step. Their expertise and guidance can help you maximise your financial aid eligibility while also ensuring your retirement plans remain on track. Remember, each situation is unique, and a qualified financial advisor can provide the personalised advice you need to make confident decisions.

Frequently asked questions