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How a Student’s IRA Is Counted for Financial Aid

Money withdrawn from an IRA in the student’s name is hit hard by the federal financial aid formulas.

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I read your article about setting up an IRA for a kid, and I was wondering how a college student’s Roth IRA is counted for financial aid purposes.

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Assets in an IRA—whether held by the parent or the student—are excluded from financial aid calculations. IRA withdrawals, on the other hand, are included in the income calculations on the federal financial aid forms. Money withdrawn from a child’s IRA is considered to be the student’s income and is hit hard by the financial aid calculations. The federal financial aid formulas expect students to contribute 50 cents of every $1 earned (after an income-protection allowance of about $6,400) toward college costs.

And even though Roth contributions can be withdrawn anytime without penalties or taxes, all withdrawals from the student’s Roth IRA—whether from contributions or earnings—are considered to be student income in the financial aid formulas, says Marty Allenbaugh, a certified financial planner with T. Rowe Price, which lets kids open Roth IRAs with a minimum initial investment of $1,000.

If your child has a Roth IRA and you’re concerned about financial aid, the key is not to withdraw money from the account until after the last financial aid form is filed. This will be easier to do after the deadline for filing the Free Application for Federal Student Aid changes this fall. For the 2017-18 academic year, you’ll be able to use your tax returns from the year your student was a sophomore when applying for aid during your student’s senior year, rather than having to use your tax returns from the year he or she was a junior. See New Strategies to Get More Financial Aid for more information about the new timeline. Also see the U.S Department of Education’s Student Aid website for more information about financial aid.

For more information about the federal financial aid forms, see How to Fill Out a FAFSA for College Financial Aid. For more about Roth IRAs for kids, see Roth IRAs Are for Kids, Too.

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Got a question? Ask Kim at askkim@kiplinger.com.