An error on the Free Application for Federal Student Aid, or FAFSA, can be costly. As the price of tuition at schools across the country continue to strain budgets, a properly completed FASFA can help put financial resources in the hands of those who need them most.
In order to achieve the greatest possible benefits from your FAFSA, you need to know exactly what financial information must be reported and where to report it. As part of your application, you will need to provide detailed financial information, including accurate reporting on all of your current investments. That being said, it is very important to realize that a 401(k) is not considered a reportable investment for FAFSA purposes. Because of that, claiming the value of a 401(k) account by mistake could reduce the amount of federal aid you or your dependent is awarded. This is an important distinction which could help ease the burden of expenses and tuition on students across the country.
Reporting Your Investments
Accurate reporting is an absolute must on your FAFSA. Federal student aid officers are quick to dismiss applications which appear to be hurriedly put together or fail to provide a clear picture of a family or individual's current financial condition.The FAFSA requires comprehensive reporting on financial investments.
In fact, both prospective college students and their parents must disclose any investments they have. Investments can include assets such as any qualified educational benefits or Coverdell savings accounts, as well as 529 savings plans, mutual funds, stocks, bonds, money markets, or even the refund value of prepaid tuition plans.
However, the FAFSA does not require reporting on the value of life insurance or retirement accounts – including a 401(k) account. The logic behind this is as follows: while real estate can be considered an investment, you do not claim the value for the home you live in.
Reporting Untaxed Income
FAFSA lines 44A through 44J and 92A through 92I ask numerous questions about the presence of any untaxed income. It is these boxes where the amount of contributions made to a 401(k) account must be listed. Although these contributions are likely going to be tax free, this income is counted on the FAFSA and could significantly impact the amount of financial aid you will receive. Untaxed 401(k) contributions are listed on the W2 form in boxes 12A through 12D, and use the code D, E, F, G, H or S.
Adjusted Available Income
If you have contributions to a 401(k) with a lower adjusted gross income (AGI), it might first appear as if this could increase the amount of need-based financial aid you qualify for. However, while this will likely lower the AGI, the amount is added back into the FAFSA to calculate adjusted available income. When determining the eligibility for aid of certain student, Federal Student Aid officers use the adjusted available income in their final financial aid calculations.
While you must report your 401(k) contributions – even though they are tax free – you do not have to report any financial contributions made as part of a 401(k) match by an employer. The employer's contribution does not have any impact on your financial aid eligibility, regardless of the sum total.
This knowledge is very important, as it helps emphasize the fact that students, particularly those who may be employed in full-time jobs during their studies, will not be penalized for contributing money to this valuable program. Given the immense benefits of the 401(k), it should come as no surprise that the government provides incentives such as these in order to encourage individuals to benefit from what they have on offer to them.
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