Inherited IRA and FinAid

@thumper1 , my recollection from the statements from prior to death was that he was not taking the RMD, but I could very well be wrong on that. All I know is that once it was distributed, we all had to take them.

I’d posit that if the RMD is greater than $7000 at the age of 17 or 18 then the amount in the IRA is fairly substantial given that it’s being calculated based on the student’s lifetime not 10 years.

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Good point!

True, the real issue arises if it’s liquidated to fund the college costs. Then there are substantial problems with the funds being counted as income which will reduce financial aid and incur significant taxes.

It’s a good point for estate planning: don’t leave IRAs to young grandchildren who are planning to attend college with need-based aid. This would be vastly less of a problem if the money had been given to the parents instead.

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Am I the only one who sees this as a great “problem” to have?

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Absolutely!

Unfortunately no one has a crystal ball about college acceptances. And it sounds like this student has other options which don’t force the use of the inherited IRA to pay for college.

Maybe the grandparents wanted to help fund college costs.

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Indeed this may very well be the case. But in that situation it would have been much better from a tax/financial aid perspective to give the IRA or other funds to the parents with the expressed intent for it to help pay for college.

Of course leaving it to a grandchild who has already finished college would be more optimal from a tax perspective (lower RMDs for younger recipient of a pre 2020 inherited IRA), and you don’t know when you are going to die. But now the money has to be withdrawn in 10 years, I think there’s little reason to leave an IRA to young grandchildren unless you don’t trust the parents.

“I think there’s little reason to leave an IRA to young grandchildren unless you don’t trust the parents.”

Except it makes it very clear who gets what and it doesn’t go through probate. I’d put this in the "no deed goes unpunished " category.

Hey everyone, Thanks for the comments and suggestions. We will probably go through the appeals process and then end up walking away. Blossom, yes she’s lucky to have received funds at her age. But handing over your very small fortune to a college with a $10 billion endowment seems like a bad idea especially when you have other very good options. Also I personally think it’s unethical for the college to pursue her funds rather than leave them for her later successes. As I mentioned, none for he other schools did that.
Re the IRA, I do not think she will need to withdraw within 10 years since she received it prior to 2020 but I’ll check into it. If that’s the case, we may change our minds.
For the record, we still have both sets of grandparents with us! It was her great aunt.

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It’s not that great if you could end up with the IRA increasing your net cost of college.

Say there’s $100K pre-tax when doing the Profile in Oct 2021. Then your cost is increased by $25K in 2022-23. To pay that $25K you must withdraw ~$45K due to kiddie tax. Then you can end up having to pay an extra 25% of the remaining $55K plus 50% of the income (though only $25K since you get to deduct tax in the FA formula) = extra $27K needed. You withdraw just under $50K to pay that, and in your third year you are still paying about $14K extra based on 50% of the extra $27K in after tax income, even though there’s only ~$6K left to withdraw.

These are only rough calculations, and can be affected by exactly when you make withdrawals (and some of the asset protection allowances), but it’s easy to see that a pre-tax IRA might be worse than useless in helping pay for college: it could actually increase your total cost rather than help cover some of the costs unless the college makes discretionary adjustments to its calculations.

I’m not suggesting that there aren’t more tax efficient ways for a great aunt to help a kid pay for college. There are. I’m pointing out that after the fact…which is where the OP is…it seems quite unhelpful to point out what the aunt could have, should have done. It’s done. The money is available for college. It’s money that has grown, tax free, over a period of years and years

And now the OPs kid has a choice to make. Since there will be RMDs and taxes owed regardless of how she uses the money, I am not in the camp that spending it on her college education is a tragedy. Leaving the money alone to continue piling up tax free is not an option, as lovely as that sounds.

She is free to choose another college! Money often buys you choice. But regardless of the size of the college endowment she is still better off than a kid with no money.

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But that’s the point, as per the calculation above she isn’t. And if you just leave the money alone and they count 25% of it each year, then the $100K extra you pay over 4 years is from after tax income and the $100K in the account is still pre-tax money. Again you are worse off than not having the money in the first place.

Nowhere does it state that the school is unaffordable… just that the family is unhappy with the aid package, like tens of thousands of other families. The difference is that the kid who cannot afford the package offered has no choice but to decline. This kid has a choice…use the Inherited money. Colleges are not responsible for a family member who established a sub-optimal estate plan.

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Many grandparents don’t know this. They don’t know about accounts set up in the names of their grandchildren. They just don’t know this stuff.

I think this student has options. They can use their nice IRA money to fund the top choice college, if that is what it takes. OR they can save them money for something else, and attend one of the other colleges.

The grandparents left them a nice gift…really it’s something the vast majority of college students don’t even have.

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this has got to be disappointing to this family. I wonder what the original intent was from the great aunt? to help with college funding? or to have as a nest egg? Or, to use as seen fit?

just in reading these forums, it seems meets needs colleges dont care about things like supporting relatives, not a lot of cash but lots of property; and now gifted IRAs to students. i guess it’s good that they are staying somewhat consistent; but i can imagine it’s disappointing.

we do know a family who’s daughters were all gifted large trust funds from a great aunt. the parent told me their choices: use it for private HS and go to a lesser priced college; or use it all for a top college. two did the second; the third did the first option; 4th remains to be seen. But the funds were meant for education.

I don’t get this. Colleges that offer need-based institutional aid will look first to the student to contribute what is available, then to the student’s parents. The student in this case has funds that can help pay for college expenses. Apparently a certain school is not making a determination that student funds in an inherited IRA might be better used for something later in life, such as making a down payment on a house. It makes sense, from the school’s perspective, to expect the inherited IRA to be used for college expenses. College costs money. This student has some money. The school’s institutional financial aid dollars can be better spent on students that don’t have what OP’s daughter has.

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Show of hands if you think your own kids college should “protect” an 18 year olds inheritance vs expecting a kid assets to be used to pay for college.

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Colleges typically do not provide need based aid to protect student or parent assets for future use.

This student is very fortunate to have this nice nest egg. They just need to figure out what to spend it on…and when.

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The real difference is that a trust fund is post-tax money. If colleges count pre-tax assets as representing the same amount of “available” money as post-tax assets (especially with kiddie tax in play) then that’s a problem, because the assets may actually have negative value to the recipient.