As families prepare to complete the Free Application for Federal Student Aid (FAFSA) for the upcoming academic year, questions often arise regarding the treatment of retirement savings. Understanding how these assets are considered can help families accurately complete the application and maximize potential aid.
Retirement Account Balances Such As An IRA Or 401k/403b/457: Not Reported on FAFSA
The FAFSA does not require applicants to report the balances of retirement accounts as assets. This includes accounts such as 401(k)s, traditional and Roth IRAs, pension funds, and annuities. The rationale behind this exclusion is to avoid penalizing families for saving for retirement.
According to the U.S. Department of Education, “Don’t include student financial aid or retirement plans (401(k) plans, pension funds, annuities, non-education IRAs, Keogh plans, etc.) in your account balances” .
This means that when completing the FAFSA, families should omit the current values of their retirement accounts from the assets section.
Retirement Account Distributions May Impact Income
While the balances of retirement accounts are not reported, distributions from these accounts can impact the FAFSA. If a family takes a distribution from a retirement account, it may be considered income, depending on how it is reported on the tax return.
For example, if a distribution is included in the adjusted gross income (AGI) on the tax return, it will be reflected in the income section of the FAFSA. Even tax-free distributions, such as those from a Roth IRA, may need to be reported as untaxed income if they are not included in the AGI.
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).
Therefore, families should be cautious when taking distributions from retirement accounts during the years that will be considered for financial aid calculations.
Different Rules May Apply For CSS Profile
Some colleges and universities require the CSS Profile in addition to the FAFSA to determine eligibility for institutional aid. The CSS Profile may have different requirements regarding retirement assets.
Unlike the FAFSA, the CSS Profile may ask for the values of retirement accounts and consider a portion of these assets in the financial aid calculation. The exact treatment can vary by institution, so it’s important for families to review the specific requirements of each college.
Families should consult the financial aid offices of the institutions they are applying to for specific guidance on completing the CSS Profile or how a retirement plan may be treated by the college.
People Also Ask
Does a 401k need to be reported on FAFSA?
No, a 401k does not need to be reported on the FAFSA.
Does a pension get reported on FAFSA?
No, a pension does not need to be reported on the FAFSA.
What assets need to be reported on the FAFSA as investments?
Investments include real estate (do not include your primary residence), rental property, trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, etc.
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