Does a Roth IRA Count as an Investment for FAFSA?
Understand how Roth IRAs and other retirement savings are assessed for FAFSA eligibility. Get clear guidance on reporting assets for student aid.
Navigating financial aid for higher education often involves the Free Application for Federal Student Aid (FAFSA), a primary gateway to federal assistance. Families planning for college costs frequently question how various assets, especially retirement savings like Roth IRAs, are treated. Understanding their assessment for financial aid is important for maximizing eligibility.
Understanding Roth IRAs and FAFSA Basics
A Roth IRA is an individual retirement account allowing tax-free growth and withdrawals in retirement. Contributions are made with after-tax dollars. The appeal lies in the tax-exempt status of qualified withdrawals in retirement, which include contributions and earnings.
The FAFSA is the primary application for federal student aid, used to determine eligibility for grants, scholarships, work-study programs, and federal student loans. It gathers financial information, including income and assets, to calculate a Student Aid Index (SAI). Colleges use this SAI to determine financial aid eligibility.
Roth IRAs and FAFSA Asset Assessment
Qualified retirement accounts, including Roth IRAs, are not counted as an asset on the FAFSA. The balance within a Roth IRA does not directly impact the Student Aid Index (SAI) calculation. These funds are intended for retirement and are not considered readily available for immediate educational expenses.
This exclusion applies as long as the Roth IRA is maintained as a retirement account and its funds remain invested. The FAFSA does not require reporting the value of retirement accounts, including Roth IRAs, 401(k)s, traditional IRAs, pension funds, or annuities.
Distributions from a Roth IRA may be reported as untaxed income on a subsequent year’s FAFSA, depending on their nature. Income is assessed at a higher rate than assets in the financial aid formula, potentially reducing aid eligibility.
Distinguishing Other Assets for FAFSA
While Roth IRAs and other qualified retirement accounts are excluded from FAFSA asset calculations, many other common assets are counted. These countable assets are considered available resources for educational costs. Examples include current balances in savings, checking, money market funds, and the net worth of investments like mutual funds, stocks, bonds, and certificates of deposit (CDs).
The value of real estate beyond the family’s primary residence, such as rental properties or vacation homes, is also a countable asset. Additionally, 529 college savings plans, when owned by the student or a parent, are reported as a parental asset on the FAFSA. These educational savings accounts are assessed at a more favorable rate than student-owned assets.
Student-owned assets have a greater impact on financial aid eligibility, with the FAFSA expecting up to 20% of these assets to be used for college expenses. Parental assets are assessed at a lower rate, with colleges expecting up to 5.64% to contribute to college costs. This difference encourages families to hold assets in the parent’s name to maximize aid eligibility.
Reporting Assets on the FAFSA
When completing the FAFSA, accurately reporting assets is necessary to determine federal student aid eligibility. You will provide information on the current total of cash, savings, and checking accounts as of the filing date. For investments, report the net worth, which is the asset’s value minus any debt secured by that asset. Qualified retirement accounts, including Roth IRAs, are not reported as assets. Instead, report the value of other countable investments, such as non-retirement brokerage accounts, mutual funds, and 529 college savings plans (if parent or student-owned), along with the net worth of businesses and investment farms.