Downsizing/Financial Aid - Page 2

OHMomof2 · 10-22-2012, 09:20 PM

Ok it sounds like as long as the money is spent or in a retirement account when I fill out fafsa it's not a factor?

It will be far less than $250k.

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OHMomof2 · 10-23-2012, 02:02 PM

I know this topic is old but it's timely for me. I am selling our home and will likely NOT put any proceeds into a new home but instead rent - maybe pre-pay some rent and/or put down a large deposit, pay off debt, and anything left will go to savings or a retirement account.

Anyone know what THAT effect on FA will be? S is at a FAFSA only school and D won't be in college for 3 more years.

cptofthehouse · 10-23-2012, 04:48 PM

I think you are going to have a reportable gain since you are not rolling it into a new house. Also once you get the money, it will be reported as an asset but the hit on assets is not as great It's the gain that is counted as income that will hurt since the % income is hit is very high.

annoyingdad · 10-23-2012, 05:38 PM

There's not likely to be a reportable gain. The rule about rolling a gain into a new house went away in 1997. $250,000 single/$500,000 married filing jointly of gain is excludable if you've lived in the house 2 of the past 5 years. The only hit will be the amount carried as an asset. Parental assets are assessed at 5.6% above your asset allowance.

thumper1 · 10-23-2012, 05:48 PM

If you have the money from the sale of your house (no new house purchase) it will be a reported asset on the FAFSA and Profile forms.

OHMomof2 · 10-23-2012, 06:49 PM

OK, it sounds like:

1. The profit from the sale would be well under $250K so is NOT incomeI need to report for FAFSA (or pay taxes on, for that matter).

2. The cash I would have left over after paying off debt/buying a car/pre-paying rent - spending it, in other words - will be considered an asset for FAFSA unless I put it into a retirement account, with all the rules that go with that.

Is that about right?

sybbie719 · 10-23-2012, 07:05 PM

Quote:

will be considered an asset for FAFSA unless I put it into a retirement account, with all the rules that go with that.

The money that you put into a retirement account will be added back as an asset (because it is considered money that you could use for college).

OHMomof2 · 10-23-2012, 07:14 PM

I understood retirement accounts not to be reportable on FAFSA at all: Avoiding 10 Common FAFSA Mistakes | The College Solution

annoyingdad · 10-23-2012, 07:27 PM

Pre-tax money contributed to a retirement account one year is added back into AGI on the next year's FAFSA. It's considered an option to contribute to retirement rather than use the money for college.

If you would use the proceeds of the sale to contribute to a retirement account and don't take the deduction for a traditional IRA, it wouldn't be pre-tax and wouldn't be added back into AGI. You would have to have enough earned income to cover that amount and there are limits. In that scenario a Roth would seem to be best.

Amounts already in retirement accounts are not reported as assets for FAFSA.

OHMomof2 · 10-23-2012, 07:51 PM

Gotcha thanks. I doubt the amount I'm thinking of contributing will be beyond the asset exemption anyway, but you've given me options to consider, thanks.

Now this is only for my curiosity, given the above, but you have me wondering:

Wouldn't the proceeds from a house sale, an amount exempt from cap gains tax, also not be "pre-tax" since it's not taxable anyway?

annoyingdad · 10-23-2012, 08:51 PM

That's what I said, proceeds from the sale would not be pre-tax.

OHMomof2 · 10-23-2012, 08:57 PM

So if it's treated as "not pre-tax", I don't get a deduction for contributing to retirement but I also don't have to add it back to AGI and thus have it be part of a FAFSA calculation...is that right?

I appreciate your willingness to help me out with understanding this

annoyingdad · 10-23-2012, 09:25 PM

Right. Pre-tax 401k contributions are not included in AGI so have to be added back in. The amount of a deduction for a traditional IRA contribution reduces AGI so would have to be added back in. After tax contributions to Roths or contributions to traditional IRAs where the deduction isn't taken are already included in AGI so don't have to be included in AGI again. In your case contributing from assets and getting no tax advantage that reduces AGI, the amount wouldn't have to be added back in.

OHMomof2 · 10-23-2012, 09:26 PM

Thanks not-annoyingdad

NancyBurke · 02-15-2013, 05:10 PM

Okay so what if you are divorcing and splitting the proceeds from the sale of the family home? If I can't find a home and rent for a year and my half of the equity is liquid, sitting although it is slotted for a subsequent home buy when I find one, will the financial aid consider that liquid cash available for tuition and reduce my financial aid?