Paying for College

Impact of Roth Conversions on College Aid

Converting an IRA to a Roth could affect the amount of funding your child receives for school.

I’d like to convert a traditional IRA to a Roth, but my son will be going to college soon. Will converting the IRA affect our chances of getting financial aid?

It might. Even though IRA balances aren’t counted as assets in the federal financial-aid formula, converting a traditional IRA to a Roth could affect your financial-aid award because the money you convert will increase your taxable income for the year.

If you plan to apply for financial aid in the next few years, you may want to time your Roth conversion carefully, warns IRA expert Ed Slott. If your child is a high school senior, this year’s financial-aid application is unaffected because it reflects your 2009 income, But when you file for financial aid next year, a 2010 conversion could have an impact. Even if your child is a sophomore or a junior, a conversion in 2010 could affect your college-aid award if you take advantage of the opportunity to spread the tax bill for the conversion over 2011 and 2012.

If you decide to make the conversion anyway, contact the financial-aid administrators at the colleges to which your child is applying and explain that your income looks unusually high because you converted a traditional IRA to a Roth. Although there isn’t a space on the Free Application for Federal Student Aid (FAFSA) to note the Roth conversion, aid administrators are allowed to use their professional judgment to decide whether or not to count the conversion in your income, says Haley Chitty, spokesman for the National Association of Student Financial Aid Administrators. “It’s important for families to make sure that the financial-aid office is aware of it,” he says. “Different schools will handle it differently.”

Chitty recommends contacting the colleges to explain your situation as soon as your FAFSA has been processed and you’ve received your federal student-aid report, rather than waiting until you get your aid award from the college. “Some may be able to adjust your award upfront, and some may wait until you get your aid award to make any changes,” he says.

If you’ve already converted a traditional IRA to a Roth and you’re worried that the extra 2010 income could cost your family valuable college aid, remember that you can undo the conversion -- basically switch the account back to a traditional IRA -- any time before you file your 2010 tax return next spring. Doing so will eliminate the conversion income so you don’t have to report it on your student aid application.

For more information about Roth IRA conversions, see our Roth Conversions for Everyone special report. Also see our Paying for College special report for information about saving and paying for college.

Most Popular

When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
20 Best Stocks to Buy for the Joe Biden Presidency
stocks to buy

20 Best Stocks to Buy for the Joe Biden Presidency

Joe Biden has been sworn in as America's 46th president. These are 20 of the best stocks to own under the new administration.
January 20, 2021

Recommended

Biden Extends Student Loan Relief, Is Loan Forgiveness Next?
Coronavirus and Your Money

Biden Extends Student Loan Relief, Is Loan Forgiveness Next?

On his first day as president, Joe Biden continued the suspension of student loan payments until October.
January 22, 2021
What Could 2021 Hold for Your Finances?
retirement planning

What Could 2021 Hold for Your Finances?

After a wild 2020, many of us are ready for a fresh start in the new year.
January 22, 2021
Don’t Have a Pension? The SECURE Act Could Help
retirement planning

Don’t Have a Pension? The SECURE Act Could Help

If you’re worried about retirement, the SECURE Act has a lot to offer. It has several provisions to allow people to save more, for more years — and it…
January 22, 2021
12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket
Coronavirus and Your Money

12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket

President Biden's "American Rescue Plan" includes several proposals to assist people financially harmed by the pandemic.
January 20, 2021