Does Retirement Count as Income for FAFSA?
Understand how retirement income and assets affect your FAFSA financial aid eligibility. Learn what counts and how to report it accurately.
The Free Application for Federal Student Aid (FAFSA) helps students get financial assistance for higher education. Accurate reporting of financial information on this form is important, as it directly influences eligibility for federal student aid programs. Understanding how the FAFSA considers various types of income and assets is necessary for applicants and their families. This article clarifies the FAFSA’s treatment of retirement-related income and assets.
How FAFSA Defines Income
The FAFSA assesses a family’s financial strength primarily through reported income and assets to determine their Student Aid Index (SAI), which replaced the Expected Family Contribution (EFC) with the simplified FAFSA. This calculation begins with the Adjusted Gross Income (AGI), which is derived from a family’s federal income tax return, specifically Line 11 of IRS Form 1040. AGI represents wages, salaries, interest, dividends, and other income sources, minus certain deductions.
Beyond AGI, the FAFSA also considers “untaxed income and benefits.” This category includes income not subject to federal income taxes but still factored into aid calculation. Examples include untaxed Social Security benefits, untaxed portions of pension distributions, and contributions to tax-deferred retirement plans. This inclusion provides a comprehensive view of a family’s financial capacity.
Specific Treatment of Retirement Income Sources
Distributions received from retirement accounts are considered income on the FAFSA. This applies to regular distributions from pensions, 401(k) plans, and Individual Retirement Accounts (IRAs). Both the taxable and untaxed portions of these distributions can influence financial aid eligibility.
Social Security benefits are treated differently depending on their type and whether they are taxable. Taxable Social Security benefits are included in AGI. Untaxed Social Security benefits, such as Supplemental Security Income (SSI) and the untaxed portion of Social Security Disability Insurance (SSDI), are not reported on the FAFSA. However, Social Security dependent benefits can count as untaxed income for FAFSA purposes, even if not taxable for federal income tax.
Withdrawals from retirement accounts are counted as income. Even if a withdrawal from a Roth IRA is penalty-free for qualified education expenses, the entire amount, including principal and earnings, may count as untaxed income on the FAFSA. Rollover amounts from retirement accounts are excluded from the income calculation.
Contributions to tax-deferred retirement plans are added back as untaxed income on the FAFSA, even though they reduce AGI on a tax return. This adjustment ensures that reducing taxable income through retirement contributions does not artificially lower a family’s financial aid eligibility. Information for these contributions can be found in Box 12 of the W-2 form, under specific codes.
Reporting Retirement Information on the FAFSA
The FAFSA requires financial information from the “prior-prior year.” For the 2025-2026 FAFSA, 2023 tax information is used. Applicants are prompted to provide details from their federal tax returns, including AGI, untaxed portions of IRA distributions, and untaxed portions of pensions. These specific figures can be located on IRS Form 1040, such as Line 11 for AGI, and Lines 4a minus 4b for untaxed IRA distributions, and Lines 5a minus 5b for untaxed pensions.
The IRS Data Retrieval Tool (DRT) is available to streamline transferring tax information directly from the IRS to the FAFSA. This tool can prefill answers to many income-related questions, ensuring accuracy and reducing the likelihood of FAFSA verification. To use the DRT, applicants need to have filed their federal income tax returns electronically one to two weeks prior, or six to eight weeks if filed by paper.
While the DRT is a convenient option, manual entry is sometimes necessary. For instance, if an amended tax return was filed, or if a retirement rollover occurred that the DRT might not accurately capture, manual input ensures correct reporting. In such cases, applicants must input the required figures from their tax documents onto the FAFSA. This direct entry method requires attention to detail to avoid errors that could impact aid eligibility.
Understanding Retirement Assets on FAFSA
The FAFSA treats the value of qualified retirement accounts favorably by not counting them as reportable assets. Balances in accounts such as 401(k)s, traditional IRAs, Roth IRAs, 403(b)s, pension plans, SIMPLE, and Keogh plans are excluded from a family’s asset assessment. This policy encourages individuals to save for retirement without penalizing their financial aid eligibility.
This exclusion of retirement account balances differentiates them from other non-retirement assets reported on the FAFSA. For example, cash, savings, checking accounts, investments in brokerage accounts, and 529 college savings plans are included in the asset calculation. The FAFSA’s approach recognizes the long-term purpose of retirement savings.
While account balances are not reported, any funds withdrawn from these retirement accounts and subsequently held in non-retirement accounts may become countable assets in a later FAFSA cycle. This occurs if the funds are withdrawn and then retained in a liquid, non-retirement account, such as a savings or checking account, by the time the FAFSA is completed for a future academic year. The timing of withdrawals and how funds are held can therefore indirectly affect aid eligibility.