Do You Have to Report 401k on FAFSA?
Navigate student aid applications. Learn which financial details impact eligibility and how your assets are assessed for college funding.
The Free Application for Federal Student Aid (FAFSA) is a standardized form that collects financial data from students and their families. This information determines a student’s financial need and eligibility for federal, state, and institutional aid, including grants, loans, and work-study programs.
Retirement Assets on FAFSA
Funds held within qualified retirement accounts are not counted as assets on the FAFSA. This includes various types of plans such as 401(k)s, 403(b)s, 457(b)s, traditional Individual Retirement Accounts (IRAs), Roth IRAs, Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and pension plans. The federal methodology for financial aid excludes these assets to encourage long-term retirement savings and avoid penalizing families for planning for their future.
While the balances of these accounts are excluded, any distributions or withdrawals from retirement accounts that appear as income on a tax return must be reported on the FAFSA. For instance, if a distribution from an IRA or 401(k) is included in your Adjusted Gross Income (AGI), it will be considered in the income section. Untaxed portions of IRA or pension distributions are also reported as untaxed income. Pre-tax contributions to employer-sponsored retirement plans, such as 401(k)s and 403(b)s, are no longer counted as untaxed income under recent FAFSA Simplification Act changes. However, if retirement savings are held in non-traditional accounts, like a regular savings account, their value is reported as a standard asset.
Other Reportable Assets and Income
The FAFSA requires reporting of specific assets and income for both students and parents. Reportable assets include cash, the total balance in savings and checking accounts, and the net worth of investments. Investments encompass holdings like stocks, bonds, mutual funds, certificates of deposit (CDs), and money market accounts. Real estate, other than the family’s primary residence, must also be reported, with its net worth calculated as the current market value minus any associated debt.
Educational savings plans like 529 college savings plans are reported as a parent asset, even if the student is the account owner or beneficiary. However, 529 plans owned by grandparents or other relatives are not reported on the FAFSA. Accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) are considered student assets and are reported. Excluded assets include the value of the primary family residence, the cash value of life insurance policies, Health Savings Accounts (HSAs), and ABLE accounts. Personal property items like cars, boats, artwork, and jewelry are also not reported.
For income, the FAFSA collects information on both taxed and untaxed earnings. Taxed income examples include wages, salaries, tips, business income, interest income, dividend income, and capital gains. Untaxed income that must be reported includes child support received, untaxed portions of IRA or pension distributions, and housing allowances. The FAFSA uses financial information from a “prior-prior year” tax return. For example, applying for aid for the 2024-2025 academic year requires income and tax information from the 2022 tax year.
Calculating Your Student Aid Index
The financial information reported on the FAFSA is used to calculate the Student Aid Index (SAI), a number that colleges utilize to determine a student’s eligibility for federal financial aid. The SAI replaced the Expected Family Contribution (EFC) starting with the 2024-2025 FAFSA cycle. A lower SAI indicates a greater financial need, potentially leading to eligibility for more aid.
The SAI is computed using a specific formula that considers reported income, assets, and family size. Income has a more significant impact on the SAI than assets. For instance, parental assets are assessed at a lower percentage, up to 5.64%, compared to student assets, which can be assessed at a higher percentage, around 20%. The SAI provides a standardized measure of a family’s financial strength, guiding institutions in awarding federal student aid packages.