401k contributions in base income year

<p>Hi,
Could someone please advise me on the following:
My accountant says I should continue to contribute to my 401k, as much as I can, even in the base income year. From what I've read, the FAO's of colleges look at the 401k contributions and assess it just like the rest of the income, up to a rate of 47%.<br>
My accountant says the 50% matching funds from the employer on my contributions is worth more in the long run and the contributions lower my income for financial aid considerations. If someone could also clarify how the 47% assessment on 401k contributions works it would be appreciated as well.
Thanks!</p>

<p>In it's most simplest form, basically what happens is money that you contributed into your 401k in the current year (not the monies that are already in the account) is considered income.</p>

<p>For example: you make 50k a year. You contribute 10% or 5k to your 401k bringing your income down to 45K (before taxes/adjustments). FA officers will not look at your 45K income but your 50k income.</p>

<p>The money that you deposit into your 401k is counted as income for the FAFSA in the year of the deposit. If you don't deposit it in a 401k, it still counts as income for that year. The only way it could not count as income would be if you didn't earn it in the first place.</p>

<p>Once it has been deposited in the 401k (along with whatever matching money that your company puts in), the FAFSA does not take it into account as an investment. The company match doesn't count at all for FAFSA.</p>

<p>So your accountant is correct. Unless you need to cut back on your 401k contributions in order to have enough cash on hand to pay for your kiddo's college expenses, you should slap as much in there as you can.</p>

<p>Now, if kiddo ends up applying for financial aid at an institution that uses the CSS Profile and/or its own financial aid formula, your entire 401k may be counted along with your home equity and all of your other investments. The Profile is a bit of a black box as each institution that uses it modifies the formula as it sees fit. When you get to that point, it is OK for you to call the financial aid offices at the individual colleges and universities and ask how they calculate need.</p>

<p>Here is a link to the current FAFSA formula. Print it out, and work through it on paper so that you can see what factors most affect your own family's results.
<a href="http://ifap.ed.gov/efcformulaguide/attachments/010512EFCFormulaGuide1213.pdf%5B/url%5D"&gt;http://ifap.ed.gov/efcformulaguide/attachments/010512EFCFormulaGuide1213.pdf&lt;/a&gt;&lt;/p>

<p>Wishing you all the best!</p>

<p>Whether your 401K contributions are added back into your income for purposes of financial-aid calculations (yes, they are) is really immaterial, in my opinion. </p>

<p>You must fund your retirement. Even if you must borrow for college, you must fund your retirement. Because nobody else will fund your retirement for you--except for your employer, whose 50% match you will forfeit if you don't make your own 401K contribution. Because you can't borrow to pay your living expenses in retirement, but you can borrow for your kids' education if you have to. Because if you don't fund your 401K now, you won't benefit from tax-sheltered growth during the years between now and your retirement.</p>

<p>It's possible that you will find you can't afford to fund your 401K and pay your family's expected contribution while your kids are in college. That would be regrettable, but it happens. But why would you compound the hit to your retirement savings by cutting off the funding earlier than necessary?</p>

<p>Although there will probably be subsequent posters who know more about financial aid than I do [EDIT: actually, some of them already came along while I was typing my reply!], I don't think your accountant is on the mark if he or she is telling you "the contributions lower [your] income for financial aid considerations." But I absolutely agree with his or her assertion that the 50% matching contribution from your employer is worth more than anything you could accomplish by not making those 401K contributions.</p>

<p>thanks for the replies. I don't understand how the FAO's assess 401 k contributions up to a maximum rate of 47%. What does that mean?</p>

<p>Where did you get that factoid? If you can tell us that, maybe someone can figure out what it means. The only thing I can think of off the top of my head is that that comment takes into account the change in federal and state taxes based on reducing your AGI by contributing to a conventional 401k. But that is way more math than I want to try doing this morning!</p>

<p>^The "47%" comes from the top bracket that FAFSA used to compute your EFC. Basically, for every dollar you make over a certain amount, FAFSA adds $0.47 to your EFC.</p>

<p>The amount needed to reach the 47% bracket is not all that high, so if you consider your 401k contribution as the last dollars you make, when it gets added back into your income it often adds 47 cents per dollar to your EFC.</p>

<p>And it's worsened by the fact that since you don't pay income tax on your 401k contribution, it lowers the amount where the 47% bracket kicks in.</p>

<p>The problem is, since you've put the money in the 401k you don't actually have it to pay college expenses, even though it is counted as if you do have it.</p>

<p>P.S. "and the contributions lower my income for financial aid considerations."</p>

<p>Your account is wrong, it will lower your assets that are considered, but not your income.</p>

<p>The "47%" comes from the top bracket that FAFSA used to compute your EFC. Basically, for every dollar you make over a certain amount, FAFSA adds $0.47 to your EFC."</p>

<p>What is the amount that triggers the 47% added to the EFC?</p>

<p>thanks for all the nice replies.</p>

<p>Contribute to your retirement as others have stated. The only way to have this excluded from your income would be to actually NOT earn that money. That really makes no sense. Plus if you are talking about 2011, it's a little late for that now.</p>

<p>Our financial advisor told us to contribute the max to our retirement accounts. If necessary we would have lessened our contributions WHILE our kids were in college. BUT we quickly realized that our retirement INCOME would be higher if we continued our contributions AND we could actually repay a loan, if necessary, out of retirement income when the time came.</p>

<p>
[quote]
What is the amount that triggers the 47% added to the EFC?

[/quote]

It varies depending on the family.</p>

<p>Here is how to compute your EFC from parent's income in a simplified way:</p>

<p>1) Take your AGI (line 37 on the 1040)
2) Add back in retirement contributions for the year (401k, IRA)
3) Subtract Federal income tax paid (line 55 on the 1040)
4) Subtract FICA tax paid (only the employee share if self-employed)
5) Subtract an allowance for state tax, you have to look this up in a table in the EFC formula guide. 5% looks about average.
6) Subtract your income protection allowance from the table, for a family of 4 with one in college this is about $25K
7)Look up your EFC from this table:</p>

<p>



If parents’ AAI is— The parents’ contribution from AAI is—
Less than -$3,409          $750
-$3,409 to $14,600                22% of AAI
$14,601 to $18,400       $3,212 + 25% of AAI over $14,600
$18,401 to $22,100       $4,162 + 29% of AAI over $18,400
$22,101 to $25,900       $5,235 + 34% of AAI over $22,100
$25,901 to $29,600       $6,527 + 40% of AAI over $25,900
$29,601 or more          $8,007 + 47% of AAI over $29,600


</p>

<p>Notice you hit the 47% bracket at a measly $29.6K, which will translate to around $70-90K in income, depending on your tax and family situation.</p>

<p>Note this is only the parents' income portion, it does not count assets or the kid's contribution. And there are lots of other additions and deductions which may or may not apply.</p>

<p>For example:</p>

<p>$63K AGI + $7K 401k - $7K Federal tax - $5K FICA - $3K state tax - $25K income protection = $30K, which just reaches the 47% bracket. This family's EFC just from parent income is about $8200.</p>

<p>The gory details are here, it's worth figuring out how the calculation is done: THE</a> EFC FORMULA, 2012-2013</p>

<p>This was 2009 post that talks about it. The limit of $70,000 may have gone up in 2012 but it would marginal </p>

<p>401</a> K Contributions : FAFSA : Financial Aid Forums and Discussion Board</p>

<p>
[quote]

First, the money that you have accumulated in your 401K or IRA can not be used in either the FAFSA or CSS Profile calculations. However, your contributions to either a 401K or IRA are considered and are very important. Those contributions are considered to be untaxed income, and depending on your Adjusted Gross Income (AGI) can make a big difference in how much aid you do not receive. If your or your parents AGI is over $70,000, then your 401K contributions can be assessed at up to 47%. That means that determine your contribution and multiply by 47%. The formula will add this number on to your Expected Family Contribution (EFC).</p>

<p>Therefore, it is best to consider what you EFC would be without your retirement contribution, and determine for yourself if the retirement savings are worth what you will loose in financial aid. Basically the US Department of Education considers that the money you are saving for retirement during college years should have been saved for college. So the tax break really doesn't help you, and in fact, usually hurts you more.

[/quote]
</p>

<p>stpetejack -</p>

<p>Once a family makes enough money so that the student doesn't qualify for a Pell Grant and subsidized Stafford Loans, it really doesn't matter how much bigger their EFC is. The only money your kid will be guaranteed to get will be the un-subsidized Stafford Loans, and anyone who files the FAFSA can get those no matter what their parents earn or have in the bank. </p>

<p>It is really important to remember that very few colleges and universities will actually cough up enough financial aid to make it possible for you to only have to pay your EFC. Those that do are the ones that are the very hardest to get into - in part because of that kind of aid policy. You are best off crunching your own numbers, and getting clear with yourself and your student just exactly how much your family can afford to pay from a combination of parental savings, parental current income, parental loans, student savings, student current income, and student loans. That figure, whatever it is, drawn from whatever resources your family believes to be appropriate, is your own personal baseline for college costs. Your student's safety school is one that you know won't cost a cent more than that.</p>

<p>So, now it's probably clear that you can't do anything to change how your income will be looked at ...no matter if it's "income" or 401 contribution....it's the same. </p>

<p>The only thing that matters is if you're high income or not...that determines the %</p>

<p>Now....If your child is applying to FAFSA-only schools, then all of this worry may be for naught since most don't meet need. Once your EFC is beyond Pell (for low incomes), you may not see much aid ANYWAY.</p>

<p>People often worry about these things...EFC and 401k contributions and assets when often it's all for naught. For many people, once their EFC is beyond Pell amounts (about $5k), they end up having to pay much more than their EFC.</p>

<p>If your child is applying to CSS Profile schools, then its up to each school to calculate what your family should contribute....</p>

<p>mom2collegekids what is the income limit to qualify for pell grants?</p>

<p>^^^</p>

<p>I don't know if there's an income limit because family size, number of kids in college, and other things come into the EFC calculation. The EFC has to be about less than 5,000.</p>

<p>what is your EFC?</p>