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.
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 Money withdrawn from a child’s IRA is considered to be the student’s income and is hit hard by the financial aid calculations.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And even though Roth contributions can be withdrawn anytime without penalties or taxes, all withdrawals from the student’s Roth IRA—whether from contributions or earnings—are considered to be student income in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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
-
Strategies to Optimize Your Social Security BenefitsTo maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
-
Don’t Forget to Update Beneficiaries After a Gray DivorceSome states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
-
Debit Cards vs Charge Cardscredit & debt Whether sticking to a budget or reaping big rewards, understand whether debit cards vs charge cards are right for you.
-
Four Smart Steps To Take Before Buying Your First Homehome Buying your first home can be daunting. Here are four things you need to do years before you start house-hunting to prepare financially for the biggest purchase of your life.
-
8 Times You Should Contact Your Financial AdviserWhether you experience a job change or begin caring for aging parents, your financial adviser can help manage the impact on your financial plan.
-
The 25 Cheapest Places to Live: U.S. Cities Editionplaces to live Have a look at the cheapest places to live in America for city dwellers. Is one of the cheapest places to live in the U.S. right for you?
-
The FAFSA: File Early to Get Aid for CollegeThe FAFSA is the most critical document to get financial aid for college.
-
Grandparents: Now is the Time to Contribute to Your Grandkid's 529 Plans529 Plans With new changes to the FAFSA process, you can “superfund” their college savings – without affecting their financial aid status.
-
Sharing His Path to SuccessStarting Out: New Grads and Young Professionals This Native American studied tech in the Air Force and landed his dream job. Now he’s giving back.
-
PODCAST: How to Find a Job After Graduation, with Beth Hendler-GruntStarting Out: New Grads and Young Professionals Today’s successful job applicants need to know how to ace the virtual interview and be prepared to do good old-fashioned research and networking. Also, gas prices are high, but try a little global perspective.
