I have not seen this question asked before. If dh and I write a check from our HELOC to deposit into solo 401k and SEP for tax year 2018 for an above-the-line deduction, will FA office still add those funds to our 2018 household income for the purpose of determining the FA package for academic year 2020-2021 (it’s a meets-full-need university)? It’s a loan, so it’s nontaxable income.
This is what our tax/financial adviser is advising us to do because the interest on HELOC is super low and it’s worth it for the tax benefit and net gain on the investment. I googled using HELOC for IRA contributions, and it turns out that there’s a lot of literature on this and it’s recommended under many circumstances. However, there’s no literature on it’s effect on FA.
If it is paid with post tax dollars (or untaxed dollars) how will you receive a tax benefit? Won’t it be a Roth 401k/IRA, in that if any tax is owed (probably not) it is already taxed?
I don’t see how it would be added back as income since it is not income. Also don’t see how you would get a deduction.
I’m no economist or financial genius, but I believe that contributions made to a 401k (in this case, a solo 401k) or SEP is tax deductible (subject to limits - but those limits are large for self-employed people, which dh and I are.
If you are making a deductible contribution then it won’t matter what the source of the funds is, it will be reported as such, and added back to your AGI. Then you will be penalized because you won’t have paid so much tax (which is deducted in the calculation of your EFC). So for example a $30,000 contribution might mean you pay $10,000 less tax and social security and your EFC would then be ~$4700 higher.
The only potential way round this I’m aware of is if you have a company with a pension scheme where the contributions are by the company rather than being a deduction from income and are therefore not required to be reported and added back (although IMO this is not crystal clear).
If the pre tax contribution is added back in for a normal employed person, I can't see why it won't be for your scenario, the HELOC money would look like income per se as you have drawn on the line of credit. Your contribution limits are quite high for self employed sole proprietors, but wow that looks scary in the current conditions of?? an impending recession, and HELOCS are always variable rate, no? And there is no tax benefit to your use of the HELOC as it isn't for home improvements. As of 18.
Do you know what your 401K return was for last alone vs overall? Or try a YTD figure. Your HELOC is going ot be super low, like 3 ish? You have no mortgage, I assume?
A contribution to a tax-deferred retirement account, whether made as a pre-tax payment withheld from income or as a direct payment from another source that is taken as a tax deduction, needs to be reported in the same place on FAFSA as “untaxed income.”
Or are you willing to pay the non-deductible interest on the HELOC assuming better returns on the SEP and solo 401(k)? I assume your financial advisor is taking this into consideration?
This is interesting! am i understanding this right:?
reading through this, you’d save some on your your taxes owed amount by having some of your income placed in pre-tax IRA.
This money you would borrow, so you would owe interest. And, this money would be counted on income for financial aid because you aren’t paying taxes on it.
I’m interested in hearing what you figure out - where you get the financial deal! I can’t figure it out.
Without getting into too much detail, we will owe a lot in taxes this year for various reasons. Tax adviser said that instead of paying all that money to IRS, pay it to a qualified retirement account (we have a large limit because we are self-employed). IOW, pay ourselves instead of IRS and reduce tax bill substantially. Some of it would have to come from a HELOC. Yes, we know that the interest is not tax deductible. HELOC would be paid back within six months. The math works tax-wise. We are trying to think of any unintended consequences. Of course tax adviser knows nothing about financial aid calculations.
The amount you contribute to a tax deferred retirement account in 2018 will be added back in as income for financial aid purposes for the 2020-2021 academic year financial aid forms.
Not exactly the same, but in recent years, I’ve often “borrowed” from my savings account to make an IRA contribution, so that I can get the tax deduction. I pay the savings account back from later paychecks.
Payments to tax-deferred pension and retirement savings plans (paid directly or withheld from earnings), including, but not limited to, amounts reported on the W-2 forms in Boxes 12a through 12d, codes D, E, F, G, H and S. Don’t include amounts reported in code DD (employer contributions toward employee health benefits).
(emphasis in bold added)
Funds obtained from a HELOC and contributed to a tax-deferred retirement plan resulting in an above-the-line deduction would be paid directly to the retirement plan. Such a payment would need to be reported on FAFSA. It doesn’t matter where the money comes from, and besides, all money is fungible. What matters is there would be a tax-advantaged payment to a qualified retirement savings plan.
The answer is not as clear as some have indicated. If you file as an S Corp and the SEP contributions are employer contributions reported on your S Corp return, they wouldn’t be considered untaxed income and wouldn’t show up on your personal return at all. They would reduce your pass through income though, resulting in a potentially significant tax savings. Different FA offices might treat this differently so it might be hard to know for sure in advance. Same might be true of employer portion of Solo 401k contribution but I’m not familiar with how that gets reported.
We have to look into that. It can be an employer contribution. We file a partnership return, and I believe it would appear on that. But the college asks for the partnership return, Form 1065.
@brantly yes, they’ll see it on the business return but it will likely be viewed as a business expense (which it is). You’d want to check with your cpa that it won’t flow through as income. I don’t file a partnership return, which might be different than 1120s. If you’re curious about how a particular FA office will treat this, you could call anonymously, say you are putting together a college list and want to make sure you’re entering correct data in the NPC, and ask directly about business pension expenses and how they are treated.