SPIAs and FAFSA

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SPIAs and FAFSA

Postby 555 » Mon Jul 01, 2013 11:08 pm

Suppose you buy an SPIA with after tax money. Suppose you pay $500k, and get $30k per year, of which $14k is taxable.

How does FAFSA treat this as assets and/or income?

What about CSS Profile and other methods?
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Re: SPIAs and FAFSA

Postby ourbrooks » Tue Jul 02, 2013 8:50 am

From the directions on the FAFSA form:

Investments do not include the home you live in, the value of life
insurance, retirement plans (401[k] plans, pension funds, annuities, noneducation
IRAs, Keogh plans, etc.) or cash, savings and checking accounts
already reported in questions 40 and 88.
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Re: SPIAs and FAFSA

Postby 555 » Tue Jul 02, 2013 9:05 am

So the SPIA wouldn't be an asset then, right?

But what about as income?
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Re: SPIAs and FAFSA

Postby ourbrooks » Tue Jul 02, 2013 9:56 am

Here's the form: http://www.fafsa.ed.gov/fotw1314/pdf/PdfFafsa13-14.pdf

The form does ask separate questions about income reported to the IRS and income from work. Certainly, the annuity payments would show up on your tax form, so, yes it shows up as income. If the annuity is purchased with after tax money, then, if you don't purchase the annuity, it'll show up in the checking/savings account reporting.

I can't comment on whether you're better off purchasing the annuity or holding the cash to qualitfy for student aid. The rules are complex and may depend on your other income; for example, below $50,000 of income, other assets are not used in calculating eligibility.
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Re: SPIAs and FAFSA

Postby dhodson » Tue Jul 02, 2013 10:24 am

i am not in any financial industry but in essence what you are trying to do is hide assets or turn them into non countable ones for financial aide purposes. Keep in mind that if you have other things which do count like income then this may make the process moot. In addition, aide is usually in the form of loans and you have to decide if that is worth it to you. Finally many colleges may look at things differently then just FAFSA so you need to be prepared for that. Im not a big fan of using insurance products since i find personally that they are pushed inappropriately but if i didnt have any significant other assets/income that would be counted and wanted to hide the assets from fafsa then i might take a look at using an insurance product (in this case MECing a WL policy) like this:

http://www.fatwallet.com/forums/finance/1263974/

The idea would be that id do this for the few years necessary for aide then surrender the policy (paying the tax/penalty on gains). This way i wouldnt be stuck in the product for the rest of my life.
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Re: SPIAs and FAFSA

Postby 555 » Tue Jul 02, 2013 9:54 pm

dhodson wrote:I am not in any financial industry but in essence what you are trying to do is hide assets or turn them into non countable ones for financial aide purposes.


Just to clarify this is a possible future scenario where I could early retire in the middle of year N (aged late 50s) and oldest child would start college in Fall of year N+1. (Yes, I'm a late parent.)

I will never get a pension or social security, so thinking about getting an SPIA is just standard prudent retirement planning, as has been discussed on this forum many times. But with retirement and kids in college starting about the same time, I need to understand how various retirement funding activities interact with FAFSA (and CSS Profile etc.).

ourbrooks wrote:Here's the form: http://www.fafsa.ed.gov/fotw1314/pdf/PdfFafsa13-14.pdf

The form does ask separate questions about income reported to the IRS and income from work. Certainly, the annuity payments would show up on your tax form, so, yes it shows up as income. If the annuity is purchased with after tax money, then, if you don't purchase the annuity, it'll show up in the checking/savings account reporting.

I can't comment on whether you're better off purchasing the annuity or holding the cash to qualitfy for student aid. The rules are complex and may depend on your other income; for example, below $50,000 of income, other assets are not used in calculating eligibility.


Thanks for the form. I knew about the Simplified Needs Test
http://www.finaid.org/educators/needs.phtml
and I could probably stay beow $50k income (AGI), but I fear that many colleges may ignore that "rule" and still consider assets despite low income.

Anyway looking at the FAFSA form, it looks like the taxable portion of an annuity payout would be included as part of AGI on line 83, while the nontaxable portion of an annuity payout may possibly(?) be included as part of AGI on line 92f. The FAFSA form says "Untaxed portions of pensions from IRS Form 1040—lines (16a minus 16b)", but it's not clear if that should also include the untaxed portion of annuity payouts. Does anyone know?

I also don't know how untaxed income affects the calculation of EFC. I'm guessing that income is income, whether taxed or not, so the whole annuity payout counts as income. Is that right?
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Re: SPIAs and FAFSA

Postby boggler » Tue Jul 02, 2013 11:59 pm

dhodson wrote:i am not in any financial industry but in essence what you are trying to do is hide assets or turn them into non countable ones for financial aide purposes. Keep in mind that if you have other things which do count like income then this may make the process moot. In addition, aide is usually in the form of loans and you have to decide if that is worth it to you. Finally many colleges may look at things differently then just FAFSA so you need to be prepared for that. Im not a big fan of using insurance products since i find personally that they are pushed inappropriately but if i didnt have any significant other assets/income that would be counted and wanted to hide the assets from fafsa then i might take a look at using an insurance product (in this case MECing a WL policy) like this:

http://www.fatwallet.com/forums/finance/1263974/

The idea would be that id do this for the few years necessary for aide then surrender the policy (paying the tax/penalty on gains). This way i wouldnt be stuck in the product for the rest of my life.


That whole life policy idea in the fatwallet thread is pretty interesting. Could you legitimately use that to shelter the assets?

It's pretty frustrating that assets only get counted as "retirement" assets if you happen to have them in some sort of retirement account. There are plenty of people who don't have access to such accounts that must save for retirement in taxable accounts, and thus it's unfair for that money to be double counted.
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Re: SPIAs and FAFSA

Postby 555 » Wed Jul 03, 2013 12:48 am

I found something useful. The "2013-2014 EFC Formula Guide" can be found here.
http://www.ifap.ed.gov/efcformulaguide/ ... e1314.html
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Re: SPIAs and FAFSA

Postby dhodson » Wed Jul 03, 2013 9:27 am

boggler wrote:
dhodson wrote:i am not in any financial industry but in essence what you are trying to do is hide assets or turn them into non countable ones for financial aide purposes. Keep in mind that if you have other things which do count like income then this may make the process moot. In addition, aide is usually in the form of loans and you have to decide if that is worth it to you. Finally many colleges may look at things differently then just FAFSA so you need to be prepared for that. Im not a big fan of using insurance products since i find personally that they are pushed inappropriately but if i didnt have any significant other assets/income that would be counted and wanted to hide the assets from fafsa then i might take a look at using an insurance product (in this case MECing a WL policy) like this:

http://www.fatwallet.com/forums/finance/1263974/

The idea would be that id do this for the few years necessary for aide then surrender the policy (paying the tax/penalty on gains). This way i wouldnt be stuck in the product for the rest of my life.


That whole life policy idea in the fatwallet thread is pretty interesting. Could you legitimately use that to shelter the assets?

It's pretty frustrating that assets only get counted as "retirement" assets if you happen to have them in some sort of retirement account. There are plenty of people who don't have access to such accounts that must save for retirement in taxable accounts, and thus it's unfair for that money to be double counted.



Depends on how the college your kid goes to considers things (which is very hard to predict since you dont know which college or how things will change in the future in regards to the financial aide office). They arent required to ignore WL just bc fafsa may currently. As we move forward into the future, i imagine colleges will try to crack down on what they feel is people gaming the system. These ideas are never good if you plan on having high income during the kid's college years in my view (again im not an agent nor a professional in the finance industry). Once you get to the point where you know you arent going to get any breaks or dont want the lousy breaks which are usually loans, then best to use a 529 in my view. At least then the gains used for these college expenses are tax free. The WL idea in that thread is just a way for a few years to shield money. Not a good long term plan.
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