Employer's 401K contributions in FA need formula

NJSue · 10-25-2009, 06:29 PM

College FAOs consider parent contributions out of current income to 401K plans as available income assessable for the EFC, even though the 401K fund itself it not considered. However, I have not been able to find out whether employer matching funds for an individual's contributions are considered "income" as well, even though they go directly into the 401k and aren't counted as income by the government.

The advice we have been given as parents is to maximize tax liability through minimizing 401K contributions during the college years, even to the point of not contributing at all (money to pay taxes is excluded from the FA need formula). However, I don't want to reduce my contributions so much that I reduce the matching funds from my employer. That seems like false economy. Does anyone have an answer as to how colleges regard employer contributions to retirement accounts?

And a larger question: how do you balance the need to pay for your kid's education with the need to survive in retirement! I want my child to achieve her dreams, but I don't want to be knocking on her door when I'm 70 because I have no money.

'rentof2 · 10-25-2009, 06:34 PM

I don't know the answer to your first question, but for the last one--

We have no retirement accounts, so I figure I'll just work until I can't get up anymore.

NJSue · 10-25-2009, 06:59 PM

Well, 'rent, I've told my child (not quite jokingly) that if she wants to attend a 50K+ p.a. school, she must be ready to support us in our old age. And of course, with markets as volatile as they are, no one has any guarantees, even people with retirement accounts (and I concede that I'm lucky to have one). I'm certainly willing to work to 67 (I love my job), but I see people get sick and tired (literally) in their 70s, who can't afford to quit working because they are paying off their kids' loans and supporting their own parents (in their 90s in nursing homes). There are two of my coworkers who are in this very situation.

'rentof2 · 10-25-2009, 07:42 PM

I imagine your daughter will have a range of options, including ones with a range of costs. It'll be easier for her to see the practical aspects when she can see what her offers are. Most kids and parents get very rational when looking at those figures!

(I hope someone will come along and answer your first question. My guess would be that no, contributions by your employer to your 401K would not be considered --by FAFSA-- as income for you since if they were not made they wouldn't then be available to use for college expenses. But that just seems logical to me... and financial aid isn't always logical!)

entomom · 10-25-2009, 07:50 PM

I don't think colleges count employer match because I've never seen anything on FA forms that ASKS about employer contributions, only your contributions to a 401k type of account.

I would agree with you that it seems likely to be more profitable to make just enough contribution to get your employer match.

LasMa · 10-25-2009, 07:54 PM

Sue, I don't believe that matching contributions would factor into financial aid, at least not for FAFSA, because that's based on your tax returns. Since matches don't show up on your W2, they don't show up on your 1099, and thus are not reported on FAFSA. CSS Profile, on the other hand asks for much more in-depth info. There are some FA experts here who will undoubtedly be along soon to give you a definitive answer.

And yes, I agree that sometimes the best college-financing advice runs contrary to the best overall-financing advice, and "false economy" is a good way to put it.

Columbia_Student · 10-25-2009, 08:52 PM

Even pension does not show up in FAFSA because you can't count on it to be there when you retire.

notrichenough · 10-25-2009, 09:08 PM

Quote:

how do you balance the need to pay for your kid's education with the need to survive in retirement!

We ultimately came to two conclusions: 1) saving for our retirement trumps everything; and 2) where you go for undergrad is not nearly as important as what you do there, or where you go to grad school.

So if you can't comfortably afford the $50K schools without massive loans while keeping up your retirement savings, you should strongly consider taking them off the table now, unless you can get substantial financial or merit aid. Make sure at least half the schools your D applies to are "affordable", however you define it, so that she will have a good set of options.

Quote:

Does anyone have an answer as to how colleges regard employer contributions to retirement accounts?

There is nothing on the forms that directly asks for this information, however the PROFILE schools will ask for your total retirement assets. Supposedly, if they decide you have too much in retirement savings (IOW, you've been saving too much for retirement instead of saving for college) you will be penalized in some way, although I have never seen it quantized, and I suspect it varies from school to school.

ebeeeee · 10-25-2009, 10:07 PM

FAFSA does not consider anything in a retirement account regardless of whether it was an employee or employer contribution. The profile does.
As far as the other question, our answer was to get both kids to look at schools where merit aid would come into play. Both chose schools where they get merit money and both are happy with their choices. The trade off for them was that they are both going to graduate with no loans.

mamabear1234 · 10-25-2009, 11:04 PM

"to maximize tax liability through minimizing 401K contributions during the college years"

I haven't heard this one before, I guess I see the point, since they will add tax-deductible contributions back to your income for the year. Do you have a Roth 401k you can contribute after-tax funds to? Even before the Roth 401k existed, my employer had a way to make after-tax contributions to the employee savings plan.

LasMa · 10-25-2009, 11:11 PM

^^

mamabear, I think the point of maximizing tax liability for FAFSA is that it is deducted from your income, which in turn reduces EFC. Another example of the sometimes catty-wampus logic of financial aid.

swimcatsmom · 10-26-2009, 12:45 AM

from Completing the FAFSA 07-08/The Application Questions(78)

Quote:

Payments to tax-deferred pension and savings plans. Enter amounts your parents paid into tax-sheltered or deferred annuities (whether paid directly or withheld from earnings), including—but not limited to—amounts reported on the W-2 Form, in Boxes 12a through 12d, codes D, E, F, G, H and S. They must include untaxed portions of 401(k) and 403(b) plans. Note that employer contributions to tax-deferred pension and savings plans should not be reported on the FAFSA as an untaxed benefit.

NJSue · 10-26-2009, 08:07 AM

^^^
Thanks!

freecycle · 10-26-2009, 10:02 AM

To the OP, we have not done the FAFSA yet, but just completed the CSS profile this weekend as it needed to be done for an early action school my DD applied to. I don't recall anything on there that asked about matching contributions from employer. They just asked for the total in 401k/403b/etc. and then for the employee contribution. Good Luck with the forms -- I was ready to tear my hair out by Sunday afternoon.

SlitheyTove · 10-26-2009, 05:46 PM

Quote:

The advice we have been given as parents is to maximize tax liability through minimizing 401K contributions during the college years, even to the point of not contributing at all (money to pay taxes is excluded from the FA need formula). However, I don't want to reduce my contributions so much that I reduce the matching funds from my employer. That seems like false economy.

Agree that it sounds like false economy. The matching funds are a bird in the hand. That money is in retirement accounts in your name. Reducing your 401K contribution in order to drive down your EFC may or may not result in your child receiving more grant money. It's also possible that your child will just receive more loans, in which case you'd be better off with the larger EFC, loans, and more in your retirement account. If the schools your child is applying to are full-need, no loans, it might be worth taking the gamble for the one year. If, on the other hand, your D is applying to schools that gap or have large loans as part of their FA packages, maybe not worth the gamble.

Quote:

I've told my child (not quite jokingly) that if she wants to attend a 50K+ p.a. school, she must be ready to support us in our old age.

As my mother and grandmother says/said, in every joke there's a bit of truth.

You know your own child best, but most 17 year olds wouldn't really understand what signing up for that kind of obligation means, though this varies by family and by culture. Given the choice myself, I'd much rather give my children the gift of no worries about their parents' financial security in old age. What's right for you may well be different.