We have what I fully recognize are “rich people problems.” Through a combination of circumstances we have a largeish chunk of money in a taxable account, and another in an inherited IRA which we’ll need to take distributions from.
My son is about to enter 10th grade. He does well in school and is planning on studying computer science. He feels strongly about a small -medium school, but I’m trying to keep our flagship (UMass Amherst) as an option in his head because I have no idea what he’ll actually get into these days (UW GPA 3.87 so far, and his 9th grade PSAT was 1280, that’s all I have to go on). No particularly special ECs and I don’t see that changing – swim team, scouts, a few clubs, etc).
What I’m trying to get at is I don’t know how to plan the money. If I understand it correctly, the first year his FAFSA will look at is 2025, so we don’t have a lot of time to figure it out.
Does he have any chance of getting into a college that will meet some need? Is it still better to have assets than income? Should I totally delay the IRA distributions (which you can do with inherited IRAs)? If I sell assets in the taxable account, will the capital gains count as income for the FAFSA, and then as assets later until I’ve used them?
We have very good financial advisors but they don’t deal with college planning, and the college planners we’ve spoken with just want us to take our money and put it into annuities, which we aren’t interested in doing.
For perspective if it’s helpful, I ran some NPCs, and the least expensive option for us was UMass (at full price in-state), then Vassar (probably first choice, but could he get in?), then WPI.
Happy to answer questions and/or clarify anything! I know I dumped a bunch into this. Thanks!
Your questions really can not be answered without knowing the rest of your financial picture…like your income and assets (other than what you mentioned here for assets). Some colleges also use primary home equity in their equations. And that will need to be considered as well at those schools.
I hope @BelknapPoint sees this tag. They can likely correctly answer your specific questions.
It seems to me that the income streams you are describing would fall under unearned income…but I’m not the expert here.
Anything you have in a regular savings will be assessed at almost 6% of its value. And the interest on the account will count too.
Were you planning to use these monies to fund college…or not.
Keep in mind that income is prior prior year…BUT assets are reported as of the day you file your financial aid forms.
The very generous colleges that meet need for higher income families are highly competitive for admissions. Was he considering these as likely admits anyway?
And free advice…if saving money is a high priority, you probably should be looking for colleges where he would get significant merit aid based on his stats…the stats really at the end of grade 11. You aren’t there yet.
If you weren’t planning to use these monies for college…you should consider fully funding your retirement accounts…401K, TSA etc. Those account balances are not counted in the financial aid calculations.
Thanks. We are already maxing retirement contributions and have funds put away in retirement accounts. I’ve run a whole bunch of NPCs, and because of our income and net worth, the only place he’d get need-based aid is a place that meets 100%, and I don’t know if he’d get into one of those. Too early to tell. We are fortunate that we can pay the COA if we need to, but I just don’t think it makes sense if it isn’t necessary. I’m sure he can get into some good schools for merit or go to UMass which is “only” about 37k. Pretty comfortable he’d get into UMass. He’s at one of the top schools in the state and just about everyone from his school who applies gets in.
Yes, we would use this money for school. We never had much extra aside from what we put into retirement when he was young so were unable to save. This was fine when my older daughters went to college – they went to schools that met 100% of need so we paid very little for their excellent educations – but shortly after they graduated our financial circumstances changed and I’m relearning the best way to deal with financial aid.
We are fortunate to have a lot of flexibility. We have access to a HELOC, all of the funds in the taxable account, and all of the $ in the inherited IRA. We don’t need any of the funds in either of those accounts to fund retirement or take care of the rest of our financial plan. So it’s more a situation of what’s the smartest way to handle it.
There are many donut families who aren’t eligible for FA but can’t afford any more than the in state public’s, if that (raising my hand). We’ve had several years with 3 in school, so we do get some of the federal loans subsidized (didn’t with 1 or 2 in). My kids who wanted to go oos attended less selective schools or equal schools than our flagship to get enough merit to bring it close to in state Rutgers (which is about $35,000 all in). I think UMASS offered either $16,000 or $18,000 a year. Their stats were a bit higher but you have time for scores to increase. My husband is a financial planner, there really isn’t a way to hide money you need for college. He also makes significantly more now than 10+ years ago when our oldest started, so we were only able to save a portion of college costs earlier.
If you have excess assets in taxable accounts then it may make sense to use them to pay the taxes on a Roth conversion for any pre-tax retirement accounts this year (ie before you get into the years which are looked at for FAFSA).
And if converted this year, the Roth could still be accessed tax free after Jan 1, 2029 (5 year waiting period starts Jan 1 of the conversion year) to pay college costs for junior and senior year.
Example: $100K in pre-tax IRA now. Convert to Roth and pay say $30K tax from taxable accounts. Then withdraw $30K in 2029 or 2030 and you still have $70K post-tax plus all the earnings which are no longer taxable. What you have to work out is whether your additional marginal tax rate on $100K of 2024 income (vs your expected tax rate in retirement) outweighs the 6% saving per year on the $30K taken out of your taxable accounts.
It’s tough to provide helpful info without knowing some of your financial details (which I’m not suggesting you should provide) such as income, assets, marginal tax rate, etc.
What might be helpful for you is to run the NPCs at Princeton, MIT, Harvard. Those are probably the most generous for need-based aid for most. You can use your current numbers and if there’s minimal aid then you probably don’t need to worry about how the IRA might affect things.
If there’s some aid then you can play with different scenarios (IRA distributions over 10 years, larger asset pool, etc.). That should give you a sense of the variables involved and how they affect aid. If you get to this step I’d throw in some schools with less generous aid, where home equity is considered, etc.
Of course, the odds are pretty small for anyone to get admitted to some of these schools, as you know.
I’m thinking you could then use the insights you gain to have a discussion with your financial planners about the best path forward.
(In general, yes it’s better not to create taxable income in the FA-relevant years, and assets are “taxed” less than income by the FA formulas. But whether it matters in your case depends on the specifics).
U.Mass Amherst is very good for computer science. I have worked with many, many software engineers who graduated from U.Mass, and have been very impressed by quite a few of them. As one example, a while ago here on CC I mentioned an incident where a very tough problem stumped two MIT graduates but was solved by a U.Mass graduate. This particular U.Mass graduate would be exceptional (and a nice guy) regardless of whether he had graduated from MIT, U.Mass, or somewhere else, but he also has quite a bit of company. At this time his boss was also a U.Mass graduate (for a master’s after getting his bachelor’s outside the US) and he is also exceptional as a software engineer / manager.
You might be in what is called the “donut hole”. There are many of us who have too much money (whether through income or savings) to qualify for need based financial aid, but do not have enough money to be comfortable spending $90,000+/year per child. Some of us just can’t afford the expensive private universities. Usually this constrains which colleges and universities that you can consider, but at least in our experience there are usually still multiple options available that are affordable. This may however depend upon your definition of “affordable”. There are a lot of very good universities in the US, and more outside the US.
At least in our experience recent university graduates are better off if they are able to graduate without debt, and education is also not always over with a bachelor’s degree. Some graduate programs are funded, but many are not. As one example, it is not unheard of for a CS major to get a master’s degree, and master’s degrees are usually not funded. Parents also can sometimes have health issues. Leaving some $$ in available savings can be very valuable for example if some sort of emergency comes up, or if a son or daughter decides to pursue a graduate degree.
Which of course means that I consider it to be very reasonable and prudent to take the cost of education into consideration. We set a budget for our daughters and insisted that they stick to it. This did take some schools out of consideration. One daughter when she was a high school senior was not happy about the budget restriction, but five years later as a recent university graduate she thanked me at least twice for the fact that she was able to graduate university with no debt (and she is now, several years later, 3/4 of the way through a very good graduate program that is a great fit for her).
I think that you need to figure out what you can afford to spend, and see what you can do to find universities that fit this budget.