When it comes to calculating your daughter's eligibility for financial aid, multiple variables come into play. The application form her college uses, her savings, your income and your savings all get included in the equation that calculates the aid. Your qualified retirement accounts are not directly included.
FAFSA vs. CSS Profile
Colleges typically use one of two forms to determine a student's eligibility for need-based financial aid. Most schools use the Free Application for Federal Student Aid, or FAFSA. A small subset of schools -- typically private -- also require students and their families to fill out the College Scholarship Service, or CSS, Profile form. The Profile form is a much more detailed report that requests more information about your assets.
The Financial Aid Alphabet Soup
Your daughter's eligibility for need-based financial aid comes from the difference between the total all-in cost of attendance, or COA, at her school and your estimated family contribution, or EFC. The equation is COA-EFC=aid. Your EFC gets calculated differently based on the type of school. Schools that use the FAFSA calculate it with the Federal Methodology, while those that use the CSS Profile use either the Institutional Methodology or, at a small group of schools, the more favorable Consensus Methodology.
A designated retirement account doesn't count as an asset when your EFC is calculated. However, this doesn't apply to everything you have saved and plan to use for your retirement. Instead, to be sheltered from being counted for financial aid purposes, the money has to be in a special-purpose account like an individual retirement account, 401(k), self-employment retirement account or a pension or profit sharing plan. Roth IRAs are also excluded from the EFC calculation.
How Retirement Accounts Hurt You
Your retirement savings can hurt your daughter's eligibility for need-based aid in two ways. First, money that you have saved for your retirement in a regular brokerage or bank account is treated like any other nonretirement asset. Some retirement annuity products can also count toward your EFC if your daughter attends a school that uses the CSS Profile for calculating financial aid. Second, the income that you put into your retirement account also gets counted as income. Just because you write it off on your taxes doesn't mean it won't count as income for financial aid eligibility.
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