Are Retirement Accounts Included in FAFSA?

The Free Application for Federal Student Aid (FAFSA) is a crucial document for students seeking federal financial assistance for higher education. This form helps determine a family’s financial capacity to contribute to educational costs, which in turn dictates eligibility for various federal grants, scholarships, and loans. The FAFSA collects financial information from applicants and their families to calculate a Student Aid Index (SAI), formerly known as the Expected Family Contribution (EFC). This calculated index is a key factor in how much financial aid a student may receive.

Understanding Retirement Account Treatment

Qualified retirement accounts are generally not included as assets when completing the Free Application for Federal Student Aid (FAFSA). This exclusion means balances in accounts like 401(k)s, Traditional IRAs, Roth IRAs, and pension plans do not directly impact a student’s eligibility for federal financial aid. The rationale is to avoid penalizing families diligently saving for retirement, as these funds are for long-term financial security, not immediate educational expenses.

The FAFSA’s design intentionally bypasses these retirement savings from its asset calculations, ensuring that a family’s commitment to retirement planning does not diminish their access to student aid. This policy applies to both parent-owned and student-owned qualified retirement accounts. While account balances are excluded, any distributions taken from these accounts may be reported as untaxed income on the FAFSA, potentially affecting aid eligibility. Families should exercise caution regarding withdrawals during the tax years considered for financial aid applications.

Common Retirement Account Types

The exclusion of retirement accounts from FAFSA asset calculations extends to a variety of recognized plans. Balances in 401(k) plans, employer-sponsored retirement savings accounts, are not reported. Funds held in Traditional Individual Retirement Accounts (IRAs) and Roth IRAs are also excluded. These individual retirement arrangements offer tax advantages for savings, and their value does not count against a student’s aid eligibility.

Other excluded plans include 403(b) plans, common for public school and non-profit employees, and 457 plans, typically for state and local government employees. Additionally, Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plans for Employees (SIMPLE) IRAs, often used by small business owners and self-employed individuals, are not considered reportable assets. Traditional pension plans are also among the excluded assets.

Other Assets Considered by FAFSA

While qualified retirement accounts are excluded, many other non-retirement assets are considered for federal student aid eligibility. The FAFSA requires reporting current balances of cash, savings, and checking accounts held by both the student and parents as of the submission day. This includes any physical cash held outside of bank accounts. The value of these liquid assets directly contributes to the Student Aid Index (SAI).

The net worth of investments is another category of reportable assets. This encompasses holdings such as stocks, bonds, mutual funds, certificates of deposit (CDs), money market accounts, and other securities. Real estate investments, excluding the family’s primary residence, must also be reported. Net worth is calculated by subtracting any debt directly associated with these investments from their current market value.

The net worth of businesses and investment farms is now generally included as an asset on the FAFSA, regardless of their size. Previously, small businesses with fewer than 100 employees were often excluded, but this exemption has been removed for recent FAFSA cycles. Net worth is determined by subtracting any business or farm-related debt from the fair market value of the assets, which can include land, buildings, equipment, and livestock.

College savings plans, specifically 529 plans and Coverdell Education Savings Accounts (ESAs), are also reported as assets. If a 529 plan is owned by a dependent student or a parent, it is considered a parental asset. This classification means it will have a lesser impact on financial aid eligibility compared to assets directly owned by the student. However, 529 plans owned by other relatives, such as grandparents, are not reported as assets. Distributions from grandparent-owned 529 plans were previously considered untaxed student income but are no longer reported as income starting with the 2024-2025 FAFSA.