Inherited IRA and FinAid

FWIW, I think that’s the right approach. Good luck! I hope you’ll tell us what you decide. The is the first I’ve heard of an inherited IRA being assessed this way. Thank you for sharing. We often forget that colleges are businesses first!

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Lol what


I don’t see how it’s unethical, but I do see how it is disappointing and is likely to steer you to other options.

And again, she doesn’t have to use that money to pay the assessed costs. There is nothing stopping you as her parents from using your own funds to pay that amount on her behalf, if you wanted to and were able to do so. The college doesn’t care where the funds actually come from, as long as they get paid.


Schools need to be agnostic about the source of funds. Depending on the values you apply, there are so many inequities in the system. One student’s family may have money because of generational wealth whereas another may have parents who worked overtime and scrimped and saved whereas another student may have been the recipient of a recent gift or winner of a lottery. Yet a dollar is a dollar.

As with so much about the college admissions and FA process, the parts that are upsetting are the parts that surprise us. While I am sure every school has dealt with this, I suspect that the Ivies in particular are quite familiar with the ways in which families try to “protect” assets. All but the wealthiest f families struggle with the " is it worth it?" question. OP, good lord with this decision.

A pre-tax dollar is not worth the same as a post-tax dollar (as people should consider for their retirement savings). They shouldn’t be assessed at the same percentage contribution, let alone double counted if withdrawing the money then counts as income which is assessed the following year.

Yes it’s hard for financial aid formulae to be written to take this into account, but it’s a good reason to ask for professional judgment to be applied.

But if you had a stock portfolio or extra houses you had to sell, there could be a tax consequence to liquidating those as well. We don’t know how that is seen in the formula. Asking her to liquidate doesn’t mean they expect to not share in that with Uncle Sam. If you have wage income to pay, that too is after tax. This is kind of my point.


That’s true, but parental assets/income are counted less harshly and capital gains tax rates are lower than income tax rates. This is one of those anomalies where the effective rate at which those assets are recaptured for financial aid purposes can be more than 100% of their actual value.

Similar cases include withdrawal of some tax and public assistance benefits above certain thresholds and (most problematically for many) the withdrawal of healthcare subsidies based on various income thresholds. Those create disincentives to work (and earn more money), this creates a disincentive to pass on wealth.

Disappointing and also shocking are good ways to describe the issue! They are asking for all of her funds including her small savings such that the amount that she would pay brings us over the cost of the full tuition and zeros out the aid offered. Is this not unethical? Perhaps just accounting that we were not expecting. Unfortunately we are not able to cover her costs thus she may walk away.

On another note, I do believe we have to liquidate the IRA as per the new rule as others were stating but will find out more tomorrow.

I paid for a car with after tax dollars, I buy groceries with after tax dollars, and I paid tuition with after tax dollars ( and liquidated investment accounts in order to do so). Don’t cry for me…that’s our system. I am not understanding what is so distinctive about this situation except family wanted more aid (totally understand that) and the D wants to preserve her assets (don’t we all).

How is this situation unethical?


Don’t liquidate it until the year after she leaves college. Otherwise it will be subject to kiddie tax (and other colleges may assess the income and reduce their financial aid in later years).

It’s not unethical. Disappointing for sure, but you are still getting a discount from the full cost of attendance (ie tuition, room, board etc) that many others pay. Most other colleges don’t even meet need.

If the college intends to count these assets, which they have every right to do, the important thing is to note in your appeal that they are pre-tax and so should not be assessed at the same rate as post-tax assets and they should not reduce aid in future years due to the income generated by withdrawals.


No. The school is a business and they are asking her to pay the full price. Financial aid is a gift to reduce the price for those who can’t afford the school with their income and assets. Your daughter CAN afford to pay, but she can’t afford the school and have her inheritance for when she graduations. She’d be in the same position as a ton of other recent college grads - a degree and no savings and in a better position than mine, who had no savings and some student loans.

Schools are unique in that they give a discount to those who may not be able to afford the product. If she went to buy a car, she’d pay full price and if she chose not to pay that full price, she could buy a different car or decide not to buy a car at all. It doesn’t matter that Honda or GM have a ‘big endowment’ (or make a big profit) or that there are other car makers that charge less or offer a better financing deal. Both driver A and driver B need the cars, they just have to make different choices according to their budgets.

Many companies and schools have big earnings (endowments) but that doesn’t mean they have to share with their customers or students. They set the price, you pay if you want the item. College set the price, and then give FA to SOME students based on their formula. They don’t have to give ANY discounts if they don’t want to. The Ivies could charge full price to every student and it wouldn’t be unethical. It would change the make up of the class to a higher SES group, but it’s not unethical to only offer your product to those who can pay for it.

You have the right not to ‘buy’ their product.


Please research carefully the rules on the inherited IRA. I have an inherited IRA from 2016, and from my research, the account is grandfathered into the prior rules. Also, please be sure to confirm the RMD withdrawal formula as the ratio changed this year. (You may have already done all this…)

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All students with their own assets are in this situation. The problem with this seems to be that this college is treating the IRA as a non-retirement asset and others are treating it as a retirement asset (and thus protected).

But…it’s not actually her retirement account. It’s someone else’s that she was given as an inheritance, so it is understandable why it is not in the protected class for these calculations. Honestly, my surprise is that the other colleges treated it as protected.

You are probably aware that financial aid is reapplied for each year. It is possible that wherever she attends will recharacterize this inherited IRA as a non-protected asset for years 2-4. Not saying it is likely, but IMHO definitely possible, so just wanted to put it out there for you to consider.


I am shocked that this thread has so many suggesting that the money should be protected or limited. Assets are assets… not having assets is worse than having to use your own for school.

In the US, there is $1.75Trillion is student debt, at an average of about $29k per borrower. Many will live most of their adult lives with that debt. If you don’t want to use inherited money to pay for college…you have every right to keep that money and go someplace else.


This is the odd part. The student is applying for financial aid but wants to save her own money for her later successes.


It’s not obvious to me how a college would even know it’s an inherited IRA rather than the student’s own retirement savings unless a specific explanation has been requested by the college (presumably after some human reviewer decided it’s implausible for an 18 year old to have saved $100K+ in their own retirement account). I assume it’s just been listed under retirement accounts on the Profile?

I can imagine OP’s kid would certainly be running at least some risk that the other college she attends will wake up to this fact in a subsequent year and could even decide that this should not have been reported as a retirement asset of the student?

That’s what I’m wondering. Based on what has been mentioned here, it seems like it’s not really a retirement asset of the student and should be considered as “regular” student asset not “retirement” student asset—for all the schools not just the Ivy that is treating it a such. And the other schools might decide to characterize it as such in the future.

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Yes, I’ve been asking myself this question also. I can’t recall being asked this on the CSS Profile for my kids.

It sounds like this account wasn’t included on the FAFSA because it is a retirement account so the other schools didn’t even know about it and therefore didn’t include it in the calculation of aid. But it seems because this is an inherited account it should have been included as a regular student asset. Did the OP fill out the FAFSA wrong?

I also don’t understand why the OP thinks the student should get to keep this money instead of using it to pay for college. That is how financial aid works at schools that meet need. They figure out what they think you can afford and make up the difference. People who can afford to pay more get less aid. Because of the inheritance, the student can afford to pay more. There is nothing unethical about it.


Hi all, thanks for all of the comments and suggestions. I spoke with retirement at Fidelity and wanted to clarify for all those who were asking that the inherited IRAs established prior to the changes made in 2020 do not need to be liquidated in 10 years.

The main issue with the inherited IRA is the tax issue exactly as Twoin18 has described.
It’s not intended to be used for education and therefore my daughter would have to pay taxes on each time she took out for tuition. Then there is the question of whether the college would adjust for the remaining amount each year and provide the extra aid needed to cover the tuition. We would end up paying more than the tuition when the taxes and other potential issues with adjusting are taken into consideration. This is probably why the other colleges ignored it.

As for the word that I used, “unethical,” I am not suggesting that my daughter should not pay for college. She has worked and saved money for this purpose. I am suggesting that NO child should have to liquidate their entire savings to pay for college. Our system is broken, tuition costs have skyrocketed, the issue with student debt is out of control.

Good luck to everyone and thanks again.