I think FAFSA and CSS at most colleges do not count funds in an inherited IRA (from a non-spouse relative) as assets, but disbursements from that inherited IRA count as income. So it seems to me that for freshman year, it should not impact financial aid calculations, but then if the student uses $30k to pay for their freshman year, then for the sophomore that $30k will reduce their financial aid. Does anyone have direct experience with this? Did colleges disregard inherited IRA the first year, then reduce financial aid the second year? Are there specific colleges that dealt with this favorably to you? Thanks.
Not sure I understand the question.
What is the RMD (required minimum distribution) from the inherited IRA- are you suggesting that itâs $30K? Or that your intent is to quickly liquidate the IRA by spending it down over the four years of college?
The scenario would be to take $30k disbursement per year for 4 years.
Will it push you into a higher tax bracket for each of the four years? If so, you need to weigh the tax consequences (all your income will be taxed at the higher level, not just the $30K).
Can you hold off on doing this until senior year so it wonât impact the previous yearâs aid? IRA assets wonât be listed on your FAFSAâŠ. but liquidating assets creates income, and income âcountsâ more heavily on the aid formula than assets. So your four year plan is going to generate more income, and once the âprior priorâ year shows up it is likely to reduce your aid.
Have you run some NPCâs without using the IRA funds- and are you going to qualify for significant aid???
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Who inherited the IRAâŠthe student or the parent?
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US has stepped income brackets, so the first dollars of income are taxed at the lowest bracket rate, then the next bracket, etc. But yes, it will be as if the parent (if thatâs who inherited the IRA) earned $30k more in income in the year withdrawn.
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I have an inherited IRA. I was required to take the RMD because my parent was taking it. I paid taxes on all the disbursements from this account. The balance IN the account was not included in my assets.
Remember, financial aid is based on income from prior prior year. So if your child starts college in 2026, then the 2024 tax year will be used. Presumably you wouldnât have paid their college tuition in advanceđ. That would be the 2026-2027 academic year.
For the 2027-2028 academic year, you would be using 2025 tax year information. AgainâŠYou will not yet have paid tuition for your kid in 2025.
But for the 2028-2029 academic year, you will be using 2026 tax year informationâŠand you will have paid $30,000 (and thus increased your income) from the IRA.
So for junior year, this could have a financial aid impactâŠbut really this only matters for need based aid at colleges where full need is met.
At most colleges, your studentâs full need wonât be met anyway.
One way to deal with this is to look for colleges where your student will garner significant merit aid. Merit aid does not consider your income or assets.
Another way is to wait until your spring term junior year to add to your incomeâŠusing prior prior tax year, this will not affect aid during undergrad years.
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Thank you @thumper1 for a thoughtful/detailed reply!
I do not have the inherited IRA; my child has it from a relative. So itâs the disbursement that will count in finaid calculations, not the balance in the IRA. I have been entering the balance as my kidâs asset in net price calculators. I will re-do without it to estimate finaid for years 1 & 2 of college, and repeat the calculation with $30k disbursement as my kidâs income to estimate finaid for years 3 & 4.