<p>If that lump sum distribution is in an account <em>registered as a 401(k) or IRA</em>, then those assets will not be counted towards available assets for college. Just saying X bank account is designated as a family’s retirement fund doesn’t protect it. If the latter is the case, OP’s friend may want to contact colleges to see how that might be handled. FAFSA, etc. also takes into account the age of the older parents, so there may be some protection taken into account for retirement income.</p>
<p>If OP’s friend is making IRA/401(k) contributions currently to her own retirement fund, those contributions are thorwn back into income as available for FA purposes. However, her funds already in retirement accounts are not.</p>