I am aware that any pre-tax 401k contributions reduce taxable income (lower AGI), and that those contributions are added back into income for FAFSA aid calculations as untaxed income. I have read in multiple articles how these pre-tax 401k contributions hurt one’s financial aid and result in a higher EFC. What I do not understand is that if one did not make pre-tax contribution to a 401k at all in a given year, then the income amount used for calculations for the FAFSA would be exactly the same as if contributions were made seeing as those contributions get added back to determine actual income.
Naturally, income taxes would be reduced when making pre-tax 401k contributions. Unless the FAFSA weighs the amount of taxes paid more than income, I don’t see how making pre-tax 401k contributions would actually reduce financial aid. I only see an upside in making these 401k contributions in that income taxes would be reduced and financial aid would stay the same.
If anyone can explain this in more detail, I would appreciate it greatly. No need to discuss the merits of Roth vs. Traditional - that I am clear on.