Spring is right around the corner – and with it, FAFSA applications from thousands of college-bound high school seniors, many of whom are children of our clients and others who own a Self-Directed IRA.
So how do IRA assets count when it comes to qualifying for educational financial aid under the federal system? Generally, parental retirement assets aren’t included in the financial aid calculation, since they aren’t generally available for spending on tuition. This is true for a Self-Directed IRA, conventional IRAs, Roths, traditional 401(k)s, SEPs, SIMPLE IRAs and 403(b)s. None of them are reported as assets on the Free Application for Financial Aid, or FAFSA, which is the primary form used to apply for financial aid using federal eligibility criteria.
The same is true with the CSS Profile, which is another financial aid eligibility form that many private colleges and universities use.
There’s a useful provision in IRA rules for IRA owners: You may withdraw up to $10,000 per year to pay for college costs for yourself or a family member without triggering an early withdrawal penalty if you are younger than age 59½.
Even if the IRA or Self-Directed IRA is in your child’s name, the assets generally don’t count against him or her, as long as they stay in the IRA. However, the second your child makes a withdrawal, two things change right away: Income and assets. Both the income and the assets, if they are still there next time he or she fills out the FAFSA, would potentially affect eligibility for future financial aid.
To maximize your child’s eligibility for need-based financial aid (assuming the educational system in question uses federal eligibility criteria), try to concentrate assets in the following accounts and asset classes:
IRAs, including a Self-Directed IRA. These are exempt whether they belong to you or your child.
- Home equity.
- Equity in a family-owned business.
- Cash value life insurance policies
- Section 529 and Coverdell Plans (ideally held in grandparents names, rather than in parents’ names)
Outside of that, it’s generally more advantageous to retain assets in the parents’ name rather than those of the student. Where a student is expected to commit 20 percent of his or her total assets to college expenses each year, if those same assets are held in the parents’ names, rather than the student’s. The parent is only expected to spend down 2.6 to 5.6 percent of those assets on a sliding scale depending on parental income.
Note that if a parent owns a Section 529 plan or Coverdell ESA, up to 5.6 percent of those assets are counted as ‘expected family contributions,’ and your children’s’ eligibility for need-based financial aid will be reduced accordingly. But if it’s a grandparental asset, it won’t even show up on the FAFSA, and there is no reduction in the child’s eligibility for need-based financial aid under the federal system.
Likewise, if you have income-producing assets, it’s better to hold them in the parents’ names. This is because students are expected to commit at least 50 percent of their own incomes to their education costs, while parents are expected to commit between 22 percent and 47 percent of incomes to college costs, which can be spread among multiple children.
Note: UTMA and UGMA accounts are considered a student asset, even if still held in trust.
Among the takeaways: Maximizing contributions to Self-Directed IRAs, 401(k)s and other exempt assets now may be an effective strategy for maximizing your family’s financial aid eligibility, while still keeping assets invested in profitable and tax-advantaged opportunities.
American IRA, LLC is one of America’s leading third-party administrators of self-directed retirement accounts, including Self-Directed IRAs, Coverdell ESAs and solo 401(k) plans. For more information about using self-directed strategies and the tax advantages of Self-Directed IRAs and other tax-favored accounts, contact us today at 866-7500-IRA(472). Or visit our website at www.americanira.com. We look forward to hearing from you.