Roth IRA distributions

[payingforschool]

Do Roth IRA distributions count as income on the financial aid form. The Roth IRA distribution is tax free, but it will show as a non-taxable distribution on the 1040. I guess it has an indirect impact since your bank account will be larger. But does it count also as income for financial aid calculations?

[Joseph_Hurley_SFC]

Yes it does get counted as income whether tax-free or taxable. Anyone intending to apply for financial aid next year should consider this factor before taking distributions this year (the base year).

Joe

[payingforschool]

Trying to understand the logic.......If the reason is because this money is NOW available to pay for college then what about money from my home equity line of credit? Or a Credit card cash advance (low rate of course)? Or gift from my dad to me? Do those count as income on financial aid calculations?

[payingforschool]

The Roth IRA was income, but way back when I earned it and made it my contribution. Same for a non-deductible IRA. Now if its a deductible IRA, then i would agree that it is income in the year of the distribution. But this ROTH IRA is no longer considered income anymore. So if we wanted to get to more detail, I guess no distribution from an IRA is considered income till the basis (contributions, taxable roth conversions) has been exhausted.

[payingforschool]

They both should be treated the same. If both already paid taxes on the amount withdrawn, then neither should be counted as income on financial aid.

If you put 100,000 into mutual fund 10 years ago, and now its worth 180,000 and you sell it. Do you show the 180,000 as income on financial aid? Nope, its just the gain of 80,000. Your original investment of 100,000 is not counted as income on financial aid and it SHOULDN'T be because it has no relation to your current income that needs to be shown on the Financial aid form. Same should be true with IRA distributions that have already been taxed many years ago.

[payingforschool]

Once your Roth IRA contribution or conversion is done, it cannot be considered "income" anymore, its just an asset. Just like your investment in a mutual fund.

So if i take a 50,000 Roth IRA distribution, why should Financial Aid think my income has now increased 50,000? It hasn't, I just cashed in an asset into cash - which is just another asset.

[payingforschool]

anon,

"The rules are what they are and we have to follow them."

I understand that, but to blindly accept them because a group of lawmakers decided thats the way its going to be even if it doesn't make sense, thats not how things get changed in the future.

the problem i see is that ROTH distributions are treated as income for financial aid calculations is wrong. Is it treated as income on the 1040? No. First of all, it is a return of contributions and converted amounts that have already been treated as income on the 1040 when they were made. Now 10 years later, what does this distribution have anything to do with income? None. If its the earnings (thats after all contributions and conversions have been exhausted), then i can see the logic.

if you take a 2nd job, then that income should definately be counted as income for financial aid. guess i am missing something because i'm not sure what you are saying in your example.

[user_2529]

I suggest replacing the word "income" with "IRA distribution". If it is taxable, the IRS calls it income on the 1040 and it then shows up on the FAFSA. If it is untaxed then it is supposed to show up on Worksheet B of the FAFSA. Either way it gets looked at by financial aid.

As a strategy note, it would be harmful for financial aid purposes to take an IRA distribution in December and then park it in the bank to be counted as an asset a couple months later on the FAFSA.

[payingforschool]

Can we disucss the merits specifically of a ROTH IRA distribution being included on FAFSA? It was a non-counted asset when it was in the Roth IRA. Now that its been distributed, it should just be a counted asset for FAFSA. Definatley NOT counted as income on FAFSA! Its exactly like taking a distribution from your house, by converting it into a home equity line. Is that treated as income? Nope.

[tjkohler]

Anonymous, you are missing the whole point. He is asking how money from an IRA can be counted as income instead of counting as an asset. Here, 2006 I put $4K into a Roth. It makes no money, then in 2007 I take $4K out of the Roth. FA shows me making $4K instead of having $4K asset.
"but I am failing to follow your logic as to how income received from an IRA should not count as income for financial aid purposes.:
income received? How about asset reallocated?

[payingforschool]

Anon,
Lets change TJ’s example a litte:

What if the $4000(asset) was invested in a stock (still an asset), and no gain when sold in 2007(still an asset - turned back to cash). Would the 4000 be counted as income on financial aid? Not unless you think it should be considered “untaxed income”. If the financial aid rules said you have to put it on the form, would you just “do as you are instructed” or try to understand why and change it if the logic makes no sense.

Now an IRA (asset) gets distributed in the form of cash (still an asset). How can FA call this entire amount income? Am I any richer? Whether you use this distribution money to pay tuition or put in your bank account, it just increases countable assets for FA. What FA is doing is double counting this!! They are counting it as an asset (its in your bank account or stock account or replacing money used to pay tuition) and telling you to count it as income also.

[payingforschool]

anon says "The answer lies in the fact that people typically take money out of their IRA's because they need the income. In your above example, you wouldn't take the 4K out of your Roth to reallocate it to another investment. You would remove it to supplement your income."

So any money take out of an asset should be considered income on FA. HOme equity distribution, withdrawal from my christmas fund? Doesn;t make sense.

anon says "If one spends all of their assets, they are broke. Income, on the other hand, just keeps getting replaced. Financial aid formulas expect people to spend a small portion of their assets and a large portion of their income."

Are you saying FA is calling an IRA distribution income because "it justs keeps getting replaced" I wish that were true.

[drew]

Point is that in Congress' infinite wisdom (remember, we elected them)they wrote the rules such that if an aid applicant has whopping assets parked in home, retirement, annuities and perhaps a few other buckets such as UTMA/529s then these assets are NOT counted. Once youtake them out of a protected bucker, fair or not, they are available to count. Need not be fair or logical!

[payingforschool]

Then to be more illogical, money taken out of protected bucket for the home, annuity (not sure about this one) 529, utma DON'T get counted as income on Financial Aid. But retirement distributions DO. Doesn't even matter that the reason to take the distribution is to pay for the college costs. Good job congress!!??

[rewindrw]

I am not going to argue the merits of the financial aid formula, but will say two things. First, yes, the regulation is that a non-taxable withdrawal from a Roth IRA is supposed to be reported on Worksheet B of the FAFSA, and yes, this means it will be treated as income in the federal EFC methodology.

Second, and MORE IMPORTANTLY, you can write a letter to the financial aid office and tell them that the worksheet B income is a non-taxable Roth IRA distribution, not earned income, and ask them if they will not include it as income. The data reported on the FAFSA occured the year before the student's enrollment in college. You can easily suggest that since you cannot take the same dollars out of the Roth IRA again, you can't recover those assets during the academic year. Many (if not most) financial aid officers should be willing to remove the distribution from their calculations.