Does FAFSA Consider Retirement Accounts?
Understand how FAFSA evaluates your retirement savings. Get clarity on what counts for federal student aid and what doesn't.
The Free Application for Federal Student Aid (FAFSA) is the primary gateway for federal financial aid. It collects financial information to determine eligibility for grants, scholarships, work-study, and federal student loans. Many families wonder how retirement savings are factored into this process. Understanding FAFSA’s treatment of assets is important for navigating financial aid.
How FAFSA Treats Retirement Assets
Qualified retirement accounts are generally not counted as FAFSA assets. This exclusion recognizes these funds are for long-term security, not immediate educational expenses. Balances in these vehicles do not directly impact financial aid eligibility.
This treatment extends to common qualified retirement plans. Accounts such as 401(k)s, 403(b)s, 457 plans, traditional Individual Retirement Accounts (IRAs), Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs are all excluded from FAFSA asset calculations.
Pension plans, qualified annuities, and whole life insurance policies are also not countable assets. This exclusion avoids penalizing families for saving towards retirement, allowing them to pursue educational opportunities without compromising long-term financial stability.
Situations Impacting Financial Aid Eligibility
While qualified retirement account balances are excluded, certain actions can influence financial aid eligibility. Distributions or withdrawals from retirement accounts, taxable or untaxed, are counted as income on the FAFSA in the year received. This income can increase the Student Aid Index (SAI), formerly the Expected Family Contribution (EFC), reducing aid a student may receive. For example, a penalty-free withdrawal from a Roth IRA for college expenses, while not taxed, will still be reported as untaxed income on the FAFSA.
Conversely, a direct rollover of funds between qualified retirement accounts does not count as income on the FAFSA. This is because a rollover is considered a transfer of assets between retirement vehicles, not a withdrawal for personal use. If the IRS Data Retrieval Tool (DRT) pre-fills an amount including a rollover, applicants specify the rollover amount for exclusion. This distinction helps ensure that asset transfers within the retirement system do not inadvertently affect financial aid.
Certain non-qualified deferred compensation plans or annuities, resembling retirement accounts but not meeting IRS qualifications, may be counted as FAFSA assets. If an employee has unrestricted access to funds in such a plan, the vested portion could be considered a countable asset. If funds are withdrawn from a qualified retirement account and held in a regular savings or investment account before FAFSA filing, they become countable assets.
Other Assets and Income Considered by FAFSA
Beyond retirement accounts, FAFSA considers other assets and income sources for financial aid eligibility. Countable assets include cash, balances in savings and checking accounts, and investments held in taxable brokerage accounts. This encompasses holdings such as stocks, bonds, mutual funds, and certificates of deposit (CDs). Equity in investment real estate, excluding the family’s primary residence, is also considered a countable asset.
College savings plans like 529 plans and Coverdell Education Savings Accounts (ESAs) are reported as parental assets on the FAFSA. While these plans are designed for education, their value is assessed, though at a lower rate than student-owned assets. Student-owned assets, such as those in Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, are assessed at a higher rate.
The FAFSA also considers both taxable and untaxed income. Taxable income includes wages, salaries, business income, and investment income, as reported on federal tax returns. Untaxed income sources, such as child support received, untaxed portions of pensions, or untaxed Social Security benefits, are also factored into the financial aid calculation. However, certain assets are explicitly excluded, including the net worth of the family’s primary residence, personal possessions like vehicles or household items, and the value of life insurance policies.