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New IRA affecting EFC score?

melmarjenmelmarjen Posts: 2Registered User New Member
edited November 2011 in Financial Aid & Scholarships
My mother would like to create a new IRA in the coming year, depositing $70,000 in it to start things out. Would this count as a deductible IRA payment under untaxed income? If so, will it greatly affect my EFC score? Would you recommend other ways to invest that sum without raising my EFC dramatically?
Post edited by melmarjen on
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Replies to: New IRA affecting EFC score?

  • swimcatsmomswimcatsmom Posts: 14,996Registered User Senior Member
    I don't think (99% sure - someone correct me if I am wrong) she can deposit $70,000 in an IRA in one year. There are limits to how much it is possible to put in an IRA in a tax year. For 2009 I think the limits are $5000 for age 49 and below and $6000 for 50 and over. The limits may be different for 401ks but are related to income - the lesser of the max % a company allows or some % of income set by the govt. I don't think anyone can contribute $70k to a retirement account in one calender year. [If she is talking about rolling funds from one traditional IRA into a new one then that should have no affect on the AGI (as long as she follows the rollover rules). If she is converting from a traditional into a roth then there will be tax implications and it might cause problems with the EFC.]

    A contribution to an IRA does not increase your EFC. It is just not allowed to decrease your EFC. On a tax return contributions to regular IRAs (not Roth IRAs as they are with after tax money) are deducted from income before the AGI, reducing the AGI on the tax return. The income figure reported on FAFSA is the AGI, but the IRA contribution deduction is added back to the AGI in the EFC formula as it is considered money that is available for college.
  • melmarjenmelmarjen Posts: 2Registered User New Member
    She wanted to create a brand new IRA with the $70,000 she received from an inheritance. Will the creation of that IRA be counted as a payment, or could we bypass that considering it is going directly from the trust to the IRA? Is there anyone I could contact about this, considering it's quite an unusual circumstance?
  • thumper1thumper1 Posts: 36,939Registered User Senior Member
    I don't believe you can start an IRA and deposit $70,000 into it in one year...and I don't think it matters if it is an inheritance or not.

    Your mom needs to discuss this with someone well versed in IRS code. There IS a limit on the amount of money one is able to contribute to an IRA each year. AND in every circumstance, it cannot be more than you earn in that year (at least that is my understanding).

    Regardless...money contributed TO a qualifying retirement account IS added back in as income on the FAFSA (and Profile) for the tax year used for that FAFSA. In other words, if you are completing a 2010-2011 FAFSA, the tax year would be 2009. Any money put INTO the retirement account in 2009 would be added back in as INCOME for that year. The balance IN that account is not treated as an asset by FAFSA, but is asked for by some Profile schools...no one really is sure how that is used.
    Will the creation of that IRA be counted as a payment, or could we bypass that considering it is going directly from the trust to the IRA?

    What are you talking about? Do you want to know if there is a way to roll this over so it doesn't show as money for the FAFSA...I do not think there is. Like I said...contributions to these retirement accounts are added in as income. If you are talking about avoiding paying taxes on this inheritance, I do not believe an inheritance IS counted as income on the taxes if it is below a certain amount and this would be. (check with a tax expert...I'm not one).
    Is there anyone I could contact about this, considering it's quite an unusual circumstance?

    This is NOT "quite an unusual circumstance". MANY MANY folks receive inheritances each year. AND also, many of these same folks have kids entering college (think about grandparents who leave inheritances to their kids or grandkids). Many folks would prefer to "hide" this money somehow so that they can use it for something other than college tuition. This is NOT an unusual circumstance unless there is something else you haven't put here.

    The best way to find out about IRA restrictions is to call a tax expert. Re: the FAFSA, I'm pretty positive that any contribution to a retirement account will be added in as income for the year.
  • swimcatsmomswimcatsmom Posts: 14,996Registered User Senior Member
    As I said in my post above I don't think it is possible to put $70k in an IRA in one year. The limits are much lower than that ($5-6000 in a single calander year). IRAs are also limited to earned income. She needs to talk to a company that does IRAs to find out if what she plans is even a possibility before worrying about the financial aid aspects.

    There are certain payments that can be rolled into an IRA - for instance my husband took a lump sum on his retirement and the lump sum was rolled over into a 401k. But I don't think (not an expert in this area) an inheritance can be used this way. Unless maybe the inheritance was already in an IRA?
  • swimcatsmomswimcatsmom Posts: 14,996Registered User Senior Member
    Regardless...money contributed TO a qualifying retirement account IS added back in as income on the FAFSA (and Profile) for the tax year used for that FAFSA.
    I think money put in a Roth would not be added back as income as it is already after tax so would not have reduced the AGI in the first place.

    Nonetheless I don't think it is possible to put $70k in an IRA in one year so it is all moot.
  • notrichenoughnotrichenough Posts: 5,535Registered User Senior Member
    It's not possible AFAIK to legally put $70,000 in an IRA, unless you are rolling it over from some other sheltered account like a 401k or another IRA.
    Would you recommend other ways to invest that sum without raising my EFC dramatically?
    If you are applying to FAFSA-only schools, and your mom owns a house, she could use it to pay down her mortgage. House equity is not counted on the FAFSA.

    For PROFILE schools, there are some things you can do with life insurance to shelter the money, but it is somewhat complicated and the benefits are uncertain.
    If you are talking about avoiding paying taxes on this inheritance, I do not believe an inheritance IS counted as income on the taxes if it is below a certain amount and this would be.
    There are no inheritance taxes at the federal level. There are 11 states that have inheritance taxes in some form: Connecticut, Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee. If you don't live in one of these states, there are no taxes due.

    Inheritances are not income, but will add to your assets. So only 5.6% max will be added to your EFC.
  • scottaascottaa Posts: 1,037Registered User Senior Member
    You could look at putting it into an annuity. This would remove it from FAFSA consideration, but not Profile.
  • vballmomvballmom Posts: 3,132Super Moderator Senior Member
    The 2009 IRA contribution limit is $5,000. However, if your mother will be 50 or older by the end of the year, she can contribute an extra $1,000, for a $6,000 total contribution limit.

    These limits apply to both regular and Roth IRAs. Although your mother may be eligible to contribute to both plans, her combined contribution to both accounts cannot exceed the limit ($5,000 or $6,000).

    Let's look at the big picture. Depending on your mother's age, she'll have an asset protection allowance of $45-$50,000. That will reduce the effect of the additional $70,000 to around $20,000 (assuming no other assets). FAFSA will add 5.6% of that asset to your EFC. So that $70,000 inheritance adds around $1120 to your EFC. That's not a lot in the whole scheme of things. If the sole purpose of trying to move the $70K into a non-reportable asset class is to avoid the FAFSA hit, you might have a lot more flexibility to just invest it in a one-year CD at 1.6%: there's your $1120 in increased EFC right there.
  • pdcpdc Posts: 1Registered User New Member
    Hi, my first post here.
    I have a simple IRA (i'm a parent), that I want to convert into my roth ira. I can do this, all I have to do is pay taxes now (claim as income) on the money I transfer. My taxable "income" will be $25,000 more this year as a result. Will this affect my fafsa award? I would think no, as it is retireement money being transfered to retirement money.
  • swimcatsmomswimcatsmom Posts: 14,996Registered User Senior Member
    It will increase your AGI (that you must report on FAFSA) by $25,000 so yes it will increase the EFC. (Income has a bigger affect on the EFC than assets). You can request a special circumstances adjustment from the financial aid officer at the school. But it is at the financial aid officer's discretion whether they make an adjustment or not. If it were me I would hesitate to do the conversion now if financial aid is an important issue.
  • thumper1thumper1 Posts: 36,939Registered User Senior Member
    Why do you want to move this money into a Roth NOW when you apparently have a kiddo dealing with financial aid applications? Have you considered leaving the money in the regular IRA?
  • blawblaw Posts: 449Registered User Member
    I have a similar situation. I have not been employed in 2009 and so I am in the lowest tax bracket (only unemployment compensation). So this year would be a good choice for me to move some of my 401K to a Roth IRA, right? How much can I convert, without jeopardizing the financial aid chances for my son who is doing college apps now?
  • scottaascottaa Posts: 1,037Registered User Senior Member
    The form specifically excludes roll-overs.
  • blawblaw Posts: 449Registered User Member
    Well, rollover to Roth goes into AGI as taxable income on IRS 1040 right? I don't see it getting backed out on the FAFSA form.
    What am I missing?
  • scottaascottaa Posts: 1,037Registered User Senior Member
    Well, rollover to Roth goes into AGI as taxable income on IRS 1040 right? I don't see it getting backed out on the FAFSA form.

    Hmmm. Good point. I was thinking traditional rollover and untaxed income. I'm going to call FAFSA on this one.
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