Should I increase my 401K contributions in order to decrease my income for FAFSA?

Paying for College
1

It is my understanding that the FAFSA looks at your income from two years prior. My daughter is now a junior and graduating in 2027, so I believe we will be filling out our FAFSA based on 2025’s income. I also understood that FAFSA looks at your income after 401K funds are taken out, so the more you contribute to your 401K, the lower your income is on your FAFSA. If these assumptions are not correct, please let me know.

I work a part time job which is not the bulk of our family income. I just looked at my 401K, and I am only taking out a small amount of each paycheck. I could contribute a lot more over the next three months.

Is it worth it to reduce my income over the next three months by increasing my 401K contributions? We would have to weigh the hardship of not having access to that money versus the benefit of having a lower income on our FAFSA, but how much of a difference would it make to reduce my income by around $7,000?

I understand some schools have a rule where if your income is under X, your tuition will be Y. I saw this specifically at Colby and Colgate. We will probably be somewhere near the cut off for X, so shaving off a few thousand might actually make a difference there. I’m just not sure of the impact overall, however.

2

When we filled out FAFSA we had to add the 401k contributions back in, as they were considered discretionary and therefore eligible for tuition.

you should check if that is still the rule.

3

A separate but related issue is whether you should maximize your 401k contributions for the purpose of saving for retirement. If you do the math in detail, the long term advantage of tax free compound growth of retirement funds is enormous. Alternately, if you have very long term savings, the long term impact of taxes, if you have to pay taxes every year on the growth of the investments, can eventually add up to be enormous.

I am a strong believer in putting as much as you can into tax free retirement funds on the basis that this will help a lot in the long term.

Then you figure out your university budget. Then you try to find a university that is affordable for each child, and that is a good fit.

6 Likes
4

Schools with generous need-based financial aid programs that award automatic grants to families with less than X income are almost certain to require the CSS Profile, which is significantly more detailed and will account for IRA contributions, HSA contributions, etc. I don’t recall specifically how CSS treats 401k contributions, but that’s what I would research rather than the FAFSA treatment.

5

Thank you for this information! I was wondering about that. I guess I’ll have to look at each individual college.

6

I did some research on some CSS schools, and my impression is increasing 401K (reducing taxable income) will result in better FA, even these 401K will be added back (questions asking for 401K contribution). My guess these will be treated as asset later, instead as income, which will be weighted much more than asset.

You may play this game with 2-3 target CSS schools.

7

Here is my opinion. I would not do anything WRT to my retirement contributions for this one year unless you planned to do this anyway…and plan to do so for all the years your kid is in college.

Remember, most colleges do NOT meet full need for all accepted students, so doing financial gymnastics might not net you a dime more in need based aid.

1 Like
8

@kelsmom is this still the case?

9

I don’t believe you (the parent) added these in…but the colleges did add these back in as income. I’m not sure if this is still the case but I’m sure @kelsmom knows.

10

401k contributions are no longer reported as other income on the FAFSA. They are reported on Profile, and FAFSA only schools may choose to ask additional questions for their own aid (so it’s possible some may ask for this information).

2 Likes
11

FAFSA gets you access to loans.

Colby and Colgate are going to use the CSS profile - they’re going to dig deep.

Of course, we don’t know your finances so we can’t say.

But you can fill out their net price calculators with today’s formulas to see how it will work - if you put in a few scenarios.

But FAFSA itself is unlikely to impact you other than loan access.

Good luck.

12

Reducing your income by contributing to a 401K can be helpful on the FAFSA if the reduction will make your child eligible for a pell grant when they might might otherwise not be eligible (or eligible for a larger pell grant if previously your child was only eligible for a minimal one).

However, as several posters mentioned, if your child is applying to a college that uses the CSS, the 401K contributions will still be reported on the CSS and depending on the college, the financial aid office may view those contributions as discretionary income that can be used for tuition instead. But the answer will vary by college and the net price calculators can be useful in guessing. I contribute as much as I can to my 401K. D24 applied to all meet needs CSS profile colleges. However, the actual financial aid packages awarded varied by over 10K. My guess is that part of that difference reflected each individual college’s policy about retirement contributions. At the same time, , I don’t think any of the colleges (even those with the least generous packages) were counting the 401K contributions as fully available for tuition otherwise they would have been asking for an even larger family contribution. So if you can afford to contribute $7000 more to your 401K, I don’t think the colleges will claw all $7000 back. Instead they may see the funds as partially available and the good news is that you will now have more money growing in your retirement account. Again, running the net price calculator under multiple scenarios may give you some idea of what difference the contributions make at different colleges.

2 Likes