The Effect of Roth IRAs on Pell Grants

Roth individual retirement accounts, as the name suggests, were intended to help save for your post-working years. Besides the generous tax benefits of tax-free growth and potential tax-free distributions, Roth IRAs also give benefits when it comes to Pell grant eligibility, which is determined by the Free Application for Federal Student Aid, or FAFSA. However, that doesn't mean they're never going to affect how much a student gets.

Your Roth IRA

Your Roth IRA balance won't affect your child's eligibility for Pell grants because retirement accounts aren't included as investment assets. That's because retirement assets in qualified plans, including Roth IRAs, aren't reported on the FAFSA. So, you could have $1 million or more in your Roth IRA, and it would not have any effect on whether your child gets a Pell grant for his college costs.

Child's Roth IRA

Your child's Roth IRA also won't affect her eligibility for Pell grants. In the same way that the parent's Roth IRA isn't counted as an investment asset on the FAFSA, neither is the value of your child's Roth IRA.

Taxable Roth Distributions

Distributions from your Roth IRA, on the other hand, can affect Pell grant eligibility. Any taxable portion of the withdrawal is included automatically as part of your adjusted gross income on the FAFSA. Distributions from Roth IRAs are only taxable, however, if you're not taking a qualified distribution and you've already taken out all of your contributions. So, if you're planning to fund college your child's college bill with money from your Roth IRA, any taxable portion you withdraw adds to your income, and it can affect your eligibility for financial aid, including a Pell grant.

Nontaxable Roth Distributions

You must report certain nontaxable income on your FAFSA, which includes nontaxable retirement plan distributions. So, even if your distributions from your Roth IRA aren't included in your taxable income, you have to report them separately on your FAFSA -- for purposes of your eligibility for financial aid, the money adds to your income for the year. Roth IRA distributions aren't taxable if you're taking a qualified distribution -- you've had a Roth IRA for at least five years and you're either 59 1/2 or permanently disabled -- or you're just withdrawing contributions.