FAFSA student aid. Should I forgo Roth and use up brokerage account?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
User avatar
Topic Author
fortfun
Posts: 2911
Joined: Tue Apr 19, 2016 7:31 pm

FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by fortfun »

We have 2 children. Should have 85k each in their 529s at the time of college. No other money in their names.

1. If DW and I max our pretax accounts (100k+) we can get our AGI down to 50k or so. However, I'd like to go Roth on at least some of our accounts. That brings us up to well over 100k AGI. Should we forgo Roth to maximize our student aid? I'd prefer to split our Roth and traditional 50/50.

2. We could use our brokerage account to pay off mortgage now (3% loan). This would be favorable for student aid, as it would nearly empty the brokerage. Otherwise, we could just paydown the mortgage with regular payments the next 3 years but the brokerage account would show up on FAFSA.

Should we not even worry about student aid and just do what we were planning to do? With 85k in each 529, not sure we'd even qualify for aid anyway.
Thanks,
Ff
bloom2708
Posts: 8686
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by bloom2708 »

Aid = loans.

Merit is a better goal. Good SAT or ACT prep. Grades, activities, SAT scores. Etc.

We did FAFSA once for each kid in college. Never did it again.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
lazynovice
Posts: 1112
Joined: Mon Apr 16, 2012 10:48 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by lazynovice »

Not really enough information. How old are the kids? The income that matters is about two years before they start college through the last year or so of college.

You could do Roth until that time.

I would run this calculator using multiple scenarios.

https://bigfuture.collegeboard.org/pay- ... calculator

MOST schools disregard balances in retirement accounts and home equity. They assess a certain amount of all 529s owned by the parents as assets for this first kid. They don’t care about kid number two until they are in college. They assess a certain amount for the brokerage account. To maximize aid, you’d minimize income and minimize the taxable account and the 529s.

Whether the trade off of doing that is worth it is a personal decision.

You are in an income bracket where it makes sense to do the math homework though. A lot of people on this board need to plan to pay.

I’d also run the net price calculator for a school near you.
Last edited by lazynovice on Sun Apr 25, 2021 7:23 pm, edited 1 time in total.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
Makefile
Posts: 717
Joined: Fri Apr 22, 2016 11:03 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by Makefile »

If you want to optimize to this extent it would be worth grinding through the calculation by hand. https://studentaid.gov/sites/default/fi ... -fafsa.pdf and https://fsapartners.ed.gov/sites/defaul ... aGuide.pdf

I've always understood that (1) FAFSA mostly gives you loans, not scholarships or grants, anyway, although apparently some university merit scholarships require that you file one anyway (maybe it looks good for the school to have a high % filed or the statistics are useful somehow?), and (2) that the calculation assumes you can afford to spend on education (or, depending on your perspective, "lose") 5.64% of your assets and 47% of your income over $35,100 each year (although there are various deductions/exclusions such that you have to run through the calculation similar to taxable income on a tax return).

In particular, there is an addback for current year contributions to Traditional IRAs and other tax-deferred accounts, so I don't think that will help.

There used to be a streamlined calculation if you filed form 1040EZ, but with the TCJA, qualifying for the streamlined calculation looks more complicated now. That is the only way I could see for anyone with significant assets to benefit from FAFSA.
User avatar
LilyFleur
Posts: 1776
Joined: Fri Mar 02, 2018 10:36 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by LilyFleur »

Are they looking at FAFSA-only schools or CSS schools? Each requires different information and thus different strategy. The link is older, but it will give you an introduction to strategizing.
https://www.forbes.com/sites/troyonink/ ... 3543223ec

I would also advise you to google strategy on the 529 plans, as the rules vary based on whose name they are held.
Last edited by LilyFleur on Mon Apr 26, 2021 12:07 am, edited 1 time in total.
User avatar
Topic Author
fortfun
Posts: 2911
Joined: Tue Apr 19, 2016 7:31 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by fortfun »

bloom2708 wrote: Sun Apr 25, 2021 7:18 pm Aid = loans.

Merit is a better goal. Good SAT or ACT prep. Grades, activities, SAT scores. Etc.

We did FAFSA once for each kid in college. Never did it again.
Thanks Bloom. I expect child 1 to score very high on the exam. Hopefully, he can keep his 4.0 GPA. Child 2 will have a high GPA but may not score as high on the exams.
User avatar
Topic Author
fortfun
Posts: 2911
Joined: Tue Apr 19, 2016 7:31 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by fortfun »

lazynovice wrote: Sun Apr 25, 2021 7:20 pm Not really enough information. How old are the kids? The income that matters is about two years before they start college through the last year or so of college.

You could do Roth until that time.

I would run this calculator using multiple scenarios.

https://bigfuture.collegeboard.org/pay- ... calculator

MOST schools disregard balances in retirement accounts and home equity. They assess a certain amount of all 529s owned by the parents as assets for this first kid. They don’t care about kid number two until they are in college. They assess a certain amount for the brokerage account. To maximize aid, you’d minimize income and minimize the taxable account and the 529s.

Whether the trade off of doing that is worth it is a personal decision.

You are in an income bracket where it makes sense to do the math homework though. A lot of people on this board need to plan to pay.

I’d also run the net price calculator for a school near you.
Thanks Lazynovice.
User avatar
Topic Author
fortfun
Posts: 2911
Joined: Tue Apr 19, 2016 7:31 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by fortfun »

Makefile wrote: Sun Apr 25, 2021 7:22 pm If you want to optimize to this extent it would be worth grinding through the calculation by hand. https://studentaid.gov/sites/default/fi ... -fafsa.pdf and https://fsapartners.ed.gov/sites/defaul ... aGuide.pdf

I've always understood that (1) FAFSA mostly gives you loans, not scholarships or grants, anyway, although apparently some university merit scholarships require that you file one anyway (maybe it looks good for the school to have a high % filed or the statistics are useful somehow?), and (2) that the calculation assumes you can afford to spend on education (or, depending on your perspective, "lose") 5.64% of your assets and 47% of your income over $35,100 each year (although there are various deductions/exclusions such that you have to run through the calculation similar to taxable income on a tax return).

In particular, there is an addback for current year contributions to Traditional IRAs and other tax-deferred accounts, so I don't think that will help.

There used to be a streamlined calculation if you filed form 1040EZ, but with the TCJA, qualifying for the streamlined calculation looks more complicated now. That is the only way I could see for anyone with significant assets to benefit from FAFSA.
Thanks makefile.
User avatar
Topic Author
fortfun
Posts: 2911
Joined: Tue Apr 19, 2016 7:31 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by fortfun »

LilyFleur wrote: Sun Apr 25, 2021 8:42 pm Are they looking at FAFSA-only schools or CSS schools? Each requires different information and thus different strategy. The link is older, but it will give you an introduction to strategizing. The money in their

https://www.forbes.com/sites/troyonink/ ... 3543223ec

I would also advise you to google strategy on the 529 plans, as the rules vary based on whose name they are held.
Thanks LilyFleur!
cshell2
Posts: 639
Joined: Thu May 09, 2019 10:29 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

Unless you can get down to less than 27K AGI and meet the other qualifiers for auto-zero putting more into pre-tax retirement accounts to lower AGI won't help because FAFSA adds all those contributions back in anyhow.
Big Dog
Posts: 2523
Joined: Mon Sep 07, 2015 4:12 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by Big Dog »

cshell2 wrote: Sun Apr 25, 2021 8:54 pm Unless you can get down to less than 27K AGI and meet the other qualifiers for auto-zero putting more into pre-tax retirement accounts to lower AGI won't help because FAFSA adds all those contributions back in anyhow.
Exactly. Money put into a 401k/IRA and the like every year is voluntary, so its all added back to the need calculation.
User avatar
dogagility
Posts: 1518
Joined: Fri Feb 24, 2017 6:41 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by dogagility »

Net Price Calculators are your friend.
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
Independent George
Posts: 1248
Joined: Wed Feb 17, 2016 12:13 pm
Location: Chicago, IL, USA

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by Independent George »

bloom2708 wrote: Sun Apr 25, 2021 7:18 pm Aid = loans.

Merit is a better goal. Good SAT or ACT prep. Grades, activities, SAT scores. Etc.

We did FAFSA once for each kid in college. Never did it again.
Not true. Aid also includes need-based grants, and they will qualify for that with a low enough AGI. Need-based grants took 60% off the sticker price for my education.
User avatar
TomatoTomahto
Posts: 12369
Joined: Mon Apr 11, 2011 1:48 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by TomatoTomahto »

Independent George wrote: Mon Apr 26, 2021 9:21 am
bloom2708 wrote: Sun Apr 25, 2021 7:18 pm Aid = loans.

Merit is a better goal. Good SAT or ACT prep. Grades, activities, SAT scores. Etc.

We did FAFSA once for each kid in college. Never did it again.
Not true. Aid also includes need-based grants, and they will qualify for that with a low enough AGI. Need-based grants took 60% off the sticker price for my education.
It’s a popular trope on BH about aid that survives no matter how often one drives a stake through its heart.

One of the most generous schools is Princeton.
https://admission.princeton.edu/cost-ai ... id-numbers
I get the FI part but not the RE part of FIRE.
mnnice
Posts: 541
Joined: Sat Aug 11, 2012 5:48 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mnnice »

cshell2 wrote: Sun Apr 25, 2021 8:54 pm Unless you can get down to less than 27K AGI and meet the other qualifiers for auto-zero putting more into pre-tax retirement accounts to lower AGI won't help because FAFSA adds all those contributions back in anyhow.
Zero EFC is $27 but the simplified needs test is 175% of poverty for a two parent household items or presently about twice that.

Call me an odd duck, system gamer, or just plain old broke person, but I have found non loan aid plentiful for my offspring enrolled as technical college student. We have forgone Roth conversation to make it happen. We live in a paid for house. The harder part is remaining”broke” year after year. With two kids just two years apart (assuming two years differences in grade) and both looking four year colleges you need to concentrate on years they are both in school.

We probably will have six years of college and no kids enrolled at the same time. 2020’s income was not a FAFSA year and are trying to make sure 2021 remaining lowing by not converting trad to Roth or realizing too much gain.
KlangFool
Posts: 20488
Joined: Sat Oct 11, 2008 12:35 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by KlangFool »

OP,

Thank you for providing an example of why contributing to 529 is a bad idea.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
dogagility
Posts: 1518
Joined: Fri Feb 24, 2017 6:41 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by dogagility »

Thank you for providing an example of why contributing to 529 is a bad idea.
Why's that? Is it because a 529 might reduce need-based grant aid by 2.5%? viewtopic.php?f=10&t=336445&p=5736384&h ... 9#p5736384
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
KlangFool
Posts: 20488
Joined: Sat Oct 11, 2008 12:35 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by KlangFool »

dogagility wrote: Mon Apr 26, 2021 10:02 am
Thank you for providing an example of why contributing to 529 is a bad idea.
Why's that? Is it because a 529 might reduce need-based grant aid by 2.5%? viewtopic.php?f=10&t=336445&p=5736384&h ... 9#p5736384
Please read OP's first post and ask a simple question. If that 85K each in the 529 is not in the 529 but in the taxable account, OP would have accomplish the following without problem.

<<1. If DW and I max our pretax accounts (100k+) we can get our AGI down to 50k or so. However, I'd like to go Roth on at least some of our accounts. That brings us up to well over 100k AGI. Should we forgo Roth to maximize our student aid? I'd prefer to split our Roth and traditional 50/50.

2. We could use our brokerage account to pay off mortgage now (3% loan). This would be favorable for student aid, as it would nearly empty the brokerage. Otherwise, we could just paydown the mortgage with regular payments the next 3 years but the brokerage account would show up on FAFSA.>>

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
cshell2
Posts: 639
Joined: Thu May 09, 2019 10:29 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

mnnice wrote: Mon Apr 26, 2021 9:39 am
cshell2 wrote: Sun Apr 25, 2021 8:54 pm Unless you can get down to less than 27K AGI and meet the other qualifiers for auto-zero putting more into pre-tax retirement accounts to lower AGI won't help because FAFSA adds all those contributions back in anyhow.
Zero EFC is $27 but the simplified needs test is 175% of poverty for a two parent household items or presently about twice that.
True, but the retirement contributions will still be added back in after qualifying for SNT, so while the assets would be ignored, an income of "well over 100K AGI" would be too much to get any federal grant funds. Possibly some subsidized loans still.
Jack FFR1846
Posts: 13548
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by Jack FFR1846 »

I have a few thoughts.

It depends what colleges you're looking at. As was said at a college finance seminar I went to years ago, Public colleges will look most favorably on your need base, but they have no money to give you. Private colleges have plenty of money to give you but they're going to dig into your home equity, what cars you drive and all your retirement accounts.

You're one of the only posters I've seen in BH who has the possibility of need based aid beyond loans. But you'll need to work at it. It's refreshing to see someone who doesn't start out "We make $350k a year and want to maximize aid....". Anyways, you will want to fill out a test FAFSA form. You'll want to do your homework with colleges being considered to see what they offer. But focus on the the percentages. Worst: Student income, then student assets, then parent income, then parent assets. We too often focus on the easy things....parent assets and pay off the mortgage, buy a Ferrari and put the kids assets into an IRA. Do the forms and look at the colleges.
Bogle: Smart Beta is stupid
cshell2
Posts: 639
Joined: Thu May 09, 2019 10:29 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

mnnice wrote: Mon Apr 26, 2021 9:39 am
Call me an odd duck, system gamer, or just plain old broke person, but I have found non loan aid plentiful for my offspring enrolled as technical college student. We have forgone Roth conversation to make it happen. We live in a paid for house. The harder part is remaining”broke” year after year. With two kids just two years apart (assuming two years differences in grade) and both looking four year colleges you need to concentrate on years they are both in school.
I do the same. I put nearly 70% of my income into tax-deferred savings to stay below the 27K.
markcoop
Posts: 1224
Joined: Fri Mar 02, 2007 8:36 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by markcoop »

dogagility wrote: Mon Apr 26, 2021 4:52 am Net Price Calculators are your friend.
This should be the first step one does when starting to think about stuff. I understand that there are many unknowns, but in a few minutes you can get a ballpark figure of what kind of aid you will receive tailored for each college. Better yet, you can play around with the numbers to see "what if" scenarios. For some people it will be less accurate depending upon how complicated your taxes are.
Mark
cshell2
Posts: 639
Joined: Thu May 09, 2019 10:29 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

KlangFool wrote: Mon Apr 26, 2021 10:14 am
dogagility wrote: Mon Apr 26, 2021 10:02 am
Thank you for providing an example of why contributing to 529 is a bad idea.
Why's that? Is it because a 529 might reduce need-based grant aid by 2.5%? viewtopic.php?f=10&t=336445&p=5736384&h ... 9#p5736384
Please read OP's first post and ask a simple question. If that 85K each in the 529 is not in the 529 but in the taxable account, OP would have accomplish the following without problem.

<<1. If DW and I max our pretax accounts (100k+) we can get our AGI down to 50k or so. However, I'd like to go Roth on at least some of our accounts. That brings us up to well over 100k AGI. Should we forgo Roth to maximize our student aid? I'd prefer to split our Roth and traditional 50/50.

2. We could use our brokerage account to pay off mortgage now (3% loan). This would be favorable for student aid, as it would nearly empty the brokerage. Otherwise, we could just paydown the mortgage with regular payments the next 3 years but the brokerage account would show up on FAFSA.>>

KlangFool
I'm not getting it. How would having the 85K each in brokerage accounts instead of 529s change either of these? The first they're worried about switching to Roth retirement vehicles because it would raise AGI and the second they already have enough in their brokerage accounts to pay off the mortgage, so more wouldn't make it more possible to do so.
mnnice
Posts: 541
Joined: Sat Aug 11, 2012 5:48 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mnnice »

cshell2 wrote: Mon Apr 26, 2021 10:30 am
mnnice wrote: Mon Apr 26, 2021 9:39 am
Call me an odd duck, system gamer, or just plain old broke person, but I have found non loan aid plentiful for my offspring enrolled as technical college student. We have forgone Roth conversation to make it happen. We live in a paid for house. The harder part is remaining”broke” year after year. With two kids just two years apart (assuming two years differences in grade) and both looking four year colleges you need to concentrate on years they are both in school.
I do the same. I put nearly 70% of my income into tax-deferred savings to stay below the 27K.
We haven’t been contributing much new money and frankly don’t have the tax advantages space you have either. What we do have are two part-time jobs that pay about half the bills and long term gains from taxable for the rest.
User avatar
teen persuasion
Posts: 1518
Joined: Sun Oct 25, 2015 1:43 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by teen persuasion »

The current FAFSA rules and the new and improved FAFSA rules are two different animals. How old your kids are, and when they begin college, matters. You can walk thru the current FAFSA EFC calculations to see how you'd fare right now, but if your kids are a few years out its the new FAFSA rules you need to explore for quirks to exploit or avoid. Unfortunately, the new formulas haven't been fully developed, yet. Some generic new guidelines are out there, but implementation is fuzzy ATM.

We are definitely watching and planning for DS5 (16yo); this year's income will be the crucial first year FAFSA numbers for him. It's a tricky dance, because I can't quite be sure of any parts of the new FAFSA calculations, despite filing a FAFSA every year since 2008. And DH's retiring mid year (limits income), I'm still working, DS4 will probably drop off as a dependent (Covid delayed this), we like to begin Roth conversions in a lower tax bracket but don't know precisely where it would hit a FAFSA cliff (like auto EFC = 0), but also try to max refundable credits (as long as we have at least one dependent + some earned income). Way too many conflicting parts.
Tom_T
Posts: 1592
Joined: Wed Aug 29, 2007 2:33 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by Tom_T »

Jack FFR1846 wrote: Mon Apr 26, 2021 10:27 am Private colleges have plenty of money to give you but they're going to dig into your home equity, what cars you drive and all your retirement accounts.
This depends on whether the private college uses FAFSA or CSS (or both.) CSS is much more intrusive in terms of what they want to know. My daughter's college does not use CSS, so my home equity and retirement accounts weren't a factor.

One cute little twist on the two-child thing. If child A is in college, and then child B starts, the EFC for child B will definitely take that into account. But what about child A? The odds are pretty good that child A's college is not going to give you a penny more, even if EFC gets cuts in half. Colleges like to entice "new customers" with aid, but once they have you on board, that's a different story.
esteen
Posts: 181
Joined: Thu May 23, 2019 12:31 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by esteen »

cshell2 wrote: Mon Apr 26, 2021 11:48 am
KlangFool wrote: Mon Apr 26, 2021 10:14 am
dogagility wrote: Mon Apr 26, 2021 10:02 am
Thank you for providing an example of why contributing to 529 is a bad idea.
Why's that? Is it because a 529 might reduce need-based grant aid by 2.5%? viewtopic.php?f=10&t=336445&p=5736384&h ... 9#p5736384
Please read OP's first post and ask a simple question. If that 85K each in the 529 is not in the 529 but in the taxable account, OP would have accomplish the following without problem.

<<1. If DW and I max our pretax accounts (100k+) we can get our AGI down to 50k or so. However, I'd like to go Roth on at least some of our accounts. That brings us up to well over 100k AGI. Should we forgo Roth to maximize our student aid? I'd prefer to split our Roth and traditional 50/50.

2. We could use our brokerage account to pay off mortgage now (3% loan). This would be favorable for student aid, as it would nearly empty the brokerage. Otherwise, we could just paydown the mortgage with regular payments the next 3 years but the brokerage account would show up on FAFSA.>>

KlangFool
I'm not getting it. How would having the 85K each in brokerage accounts instead of 529s change either of these? The first they're worried about switching to Roth retirement vehicles because it would raise AGI and the second they already have enough in their brokerage accounts to pay off the mortgage, so more wouldn't make it more possible to do so.
As a parent of two youngins with 529s, I'm also curious, as it may change my personal trajectory. Would you mind expanding more KlangFool?
cdc
Posts: 95
Joined: Fri Jun 02, 2017 1:05 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cdc »

bloom2708 wrote: Sun Apr 25, 2021 7:18 pm Aid = loans.

Merit is a better goal. Good SAT or ACT prep. Grades, activities, SAT scores. Etc.

We did FAFSA once for each kid in college. Never did it again.
Aid does not necessarily mean loans. Both my kids got significant need-based grants. I imagine it depends on the school.
KlangFool
Posts: 20488
Joined: Sat Oct 11, 2008 12:35 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by KlangFool »

esteen wrote: Mon Apr 26, 2021 2:11 pm
cshell2 wrote: Mon Apr 26, 2021 11:48 am
KlangFool wrote: Mon Apr 26, 2021 10:14 am
dogagility wrote: Mon Apr 26, 2021 10:02 am
Thank you for providing an example of why contributing to 529 is a bad idea.
Why's that? Is it because a 529 might reduce need-based grant aid by 2.5%? viewtopic.php?f=10&t=336445&p=5736384&h ... 9#p5736384
Please read OP's first post and ask a simple question. If that 85K each in the 529 is not in the 529 but in the taxable account, OP would have accomplish the following without problem.

<<1. If DW and I max our pretax accounts (100k+) we can get our AGI down to 50k or so. However, I'd like to go Roth on at least some of our accounts. That brings us up to well over 100k AGI. Should we forgo Roth to maximize our student aid? I'd prefer to split our Roth and traditional 50/50.

2. We could use our brokerage account to pay off mortgage now (3% loan). This would be favorable for student aid, as it would nearly empty the brokerage. Otherwise, we could just paydown the mortgage with regular payments the next 3 years but the brokerage account would show up on FAFSA.>>

KlangFool
I'm not getting it. How would having the 85K each in brokerage accounts instead of 529s change either of these? The first they're worried about switching to Roth retirement vehicles because it would raise AGI and the second they already have enough in their brokerage accounts to pay off the mortgage, so more wouldn't make it more possible to do so.
As a parent of two youngins with 529s, I'm also curious, as it may change my personal trajectory. Would you mind expanding more KlangFool?
esteen,

A) If OP had been maxing up the pre-tax accounts instead of putting the money into the 529, then, the 529 money would not have been existed.

B) Or, OP could do a combination of pre-tax plus Roth over all those years, then, the 529 money would not have existed either.

C) Then, with the brokerage account paying off the mortgage, all parent's asset disappear from FAFSA calculation.

D) 85K + 85K = 170K. Roth IRA contribution over 18 years = 12K X 18 = 216K. OP could use Roth IRA contribution to pay for college education while hidden from FAFSA.

E) 529 is a great tax break for the very rich. As for the rest of us, it is not such a good deal.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
miamivice
Posts: 2344
Joined: Tue Jun 11, 2013 11:46 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by miamivice »

esteen wrote: Mon Apr 26, 2021 2:11 pm As a parent of two youngins with 529s, I'm also curious, as it may change my personal trajectory. Would you mind expanding more KlangFool?
I will restate KlangFool's argument in a different way than he explains.

KlangFool advocates not saving for college and not saving in a non-retirement account. Put all money in retirement or pay down mortgage so the FAFSA assets are as low as possible, thus potentially qualifying for need-based financial aid. Then, stop saving for retirement during the college years and instead put the money that used to go toward retirement toward college instead. This maximizes need based financial aid opportunities by minimizing assets that are counted as assets for financial aid purposes.

There are a couple potential concerns with the idea of not saving for college. The big one is that if a person is unemployed while the kids are going to college, it's mighty hard to pay the college bills without pulling money from retirement (generally not the best idea). My argument has been to save for known upcoming expenses today to free up future cash flow for other purposes then.

For our family, we set aside a total of $66,000 about 8-10 years ago when our kids were in the womb and their college fund now exceeds $250,000. I'm comfortable that we will have plenty saved up for college by the time they are 18, so we won't have to cash flow our children's college expenses.
cshell2
Posts: 639
Joined: Thu May 09, 2019 10:29 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

KlangFool wrote: Mon Apr 26, 2021 2:35 pm

D) 85K + 85K = 170K. Roth IRA contribution over 18 years = 12K X 18 = 216K. OP could use Roth IRA contribution to pay for college education while hidden from FAFSA.



KlangFool
My Roth IRA is way more valuable to me for retirement. I wouldn't want to blow it on paying for college if there were other options, and OP was saying they could get down to 50K AGI. Right now that is SNT range and next year it goes up to 60K. Then all assets are ignored anyhow. He could have a million in 529s and it wouldn't matter.

I really disagree with the premise that they're only for the rich. I'm far from rich and it's worked out pretty well for me to have them. Especially with the state's matching grant for low-income folks.
cshell2
Posts: 639
Joined: Thu May 09, 2019 10:29 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

miamivice wrote: Mon Apr 26, 2021 3:07 pm
esteen wrote: Mon Apr 26, 2021 2:11 pm As a parent of two youngins with 529s, I'm also curious, as it may change my personal trajectory. Would you mind expanding more KlangFool?
I will restate KlangFool's argument in a different way than he explains.

KlangFool advocates not saving for college and not saving in a non-retirement account. Put all money in retirement or pay down mortgage so the FAFSA assets are as low as possible, thus potentially qualifying for need-based financial aid. Then, stop saving for retirement during the college years and instead put the money that used to go toward retirement toward college instead. This maximizes need based financial aid opportunities by minimizing assets that are counted as assets for financial aid purposes.
Maximizing retirement savings during the FAFSA years is how we are able to get all our financial aid.
calwatch
Posts: 179
Joined: Wed Oct 02, 2013 1:48 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by calwatch »

If there are state grants you need to look at those terms and provisions. For example California has a very generous Cal Grant and somewhat less generous Middle Class Scholarship with fairly high income restrictions, but hard asset limits on eligibility. For state schools they use FAFSA so paying down the mortgage and purchasing new cars to keep the assets in the eligibility zone is important.
miamivice
Posts: 2344
Joined: Tue Jun 11, 2013 11:46 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by miamivice »

cshell2 wrote: Mon Apr 26, 2021 3:22 pm
miamivice wrote: Mon Apr 26, 2021 3:07 pm
esteen wrote: Mon Apr 26, 2021 2:11 pm As a parent of two youngins with 529s, I'm also curious, as it may change my personal trajectory. Would you mind expanding more KlangFool?
I will restate KlangFool's argument in a different way than he explains.

KlangFool advocates not saving for college and not saving in a non-retirement account. Put all money in retirement or pay down mortgage so the FAFSA assets are as low as possible, thus potentially qualifying for need-based financial aid. Then, stop saving for retirement during the college years and instead put the money that used to go toward retirement toward college instead. This maximizes need based financial aid opportunities by minimizing assets that are counted as assets for financial aid purposes.
Maximizing retirement savings during the FAFSA years is how we are able to get all our financial aid.
KlangFool advocates maximizing retirement savings from ages 0-18 and then drop the rate to nothing during the college years and use the money for college instead of retirement.

Note that the FAFSA years don't line up directly with the college years.

I'll leave it to the reader to come to their own conclusions about whether this makes sense for them or not.
User avatar
teen persuasion
Posts: 1518
Joined: Sun Oct 25, 2015 1:43 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by teen persuasion »

cshell2 wrote: Mon Apr 26, 2021 3:12 pm
KlangFool wrote: Mon Apr 26, 2021 2:35 pm

D) 85K + 85K = 170K. Roth IRA contribution over 18 years = 12K X 18 = 216K. OP could use Roth IRA contribution to pay for college education while hidden from FAFSA.



KlangFool
My Roth IRA is way more valuable to me for retirement. I wouldn't want to blow it on paying for college if there were other options, and OP was saying they could get down to 50K AGI. Right now that is SNT range and next year it goes up to 60K. Then all assets are ignored anyhow. He could have a million in 529s and it wouldn't matter.

I really disagree with the premise that they're only for the rich. I'm far from rich and it's worked out pretty well for me to have them. Especially with the state's matching grant for low-income folks.
If using retirement contributions to tax deferred gets your AGI down to only SNT level, it does skip asset reporting (so brokerage and 529 account balances don't increase EFC on the asset side). But SNT doesn't do an end run around the addbacks to income (of non taxable income like tax deferred retirement contributions and withdrawals from Roth accounts) that you get at auto EFC = zero AGI levels.

So SNT cuts the asset part of the calculation, but not the income side. Retirement contributions can only get around total income if they get your AGI under $27k (current FAFSA calculations) or whatever the new FAFSA version of auto SAI = 0 becomes (something about % of federal poverty level, different for different family sizes and single (225%) vs married parents (175%)).
User avatar
teen persuasion
Posts: 1518
Joined: Sun Oct 25, 2015 1:43 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by teen persuasion »

Tom_T wrote: Mon Apr 26, 2021 1:50 pm
Jack FFR1846 wrote: Mon Apr 26, 2021 10:27 am Private colleges have plenty of money to give you but they're going to dig into your home equity, what cars you drive and all your retirement accounts.
This depends on whether the private college uses FAFSA or CSS (or both.) CSS is much more intrusive in terms of what they want to know. My daughter's college does not use CSS, so my home equity and retirement accounts weren't a factor.

One cute little twist on the two-child thing. If child A is in college, and then child B starts, the EFC for child B will definitely take that into account. But what about child A? The odds are pretty good that child A's college is not going to give you a penny more, even if EFC gets cuts in half. Colleges like to entice "new customers" with aid, but once they have you on board, that's a different story.
The changes to the new FAFSA do away with the multi child discount. It's not EFC (expected FAMILY contribution) anymore, it's SAI (STUDENT aid index). They will not be dividing the end result between number in college, each one in college gets their own calculated number.

Although, to compensate, the income protection number is no longer reduced by a few thousand $ for each extra student. And the base income protection amount is roughly 20% higher than current numbers. But they also eliminated the state tax deduction. :annoyed That was a good 8 or 9% reduction in our total income number (depending on the year).
User avatar
mmmodem
Posts: 2416
Joined: Thu May 20, 2010 1:22 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mmmodem »

miamivice wrote: Mon Apr 26, 2021 3:07 pm There are a couple potential concerns with the idea of not saving for college. The big one is that if a person is unemployed while the kids are going to college, it's mighty hard to pay the college bills without pulling money from retirement (generally not the best idea). My argument has been to save for known upcoming expenses today to free up future cash flow for other purposes then.
If the money will be used for college whether it is saved in a retirement account or a 529, then it doesn't matter if one is unemployed or if it is generally not the best idea. $66k set aside in a 529 and then spent on college is the same as $66k saved in retirement accounts and then spent on college. It's the same thing. Both options save for an known upcoming expense to free up future cash flow. The preference for the latter is to maximize financial aid.
mnnice
Posts: 541
Joined: Sat Aug 11, 2012 5:48 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mnnice »

KlangFool wrote: Mon Apr 26, 2021 2:35 pm
esteen wrote: Mon Apr 26, 2021 2:11 pm
cshell2 wrote: Mon Apr 26, 2021 11:48 am
KlangFool wrote: Mon Apr 26, 2021 10:14 am
dogagility wrote: Mon Apr 26, 2021 10:02 am
Why's that? Is it because a 529 might reduce need-based grant aid by 2.5%? viewtopic.php?f=10&t=336445&p=5736384&h ... 9#p5736384
Please read OP's first post and ask a simple question. If that 85K each in the 529 is not in the 529 but in the taxable account, OP would have accomplish the following without problem.

<<1. If DW and I max our pretax accounts (100k+) we can get our AGI down to 50k or so. However, I'd like to go Roth on at least some of our accounts. That brings us up to well over 100k AGI. Should we forgo Roth to maximize our student aid? I'd prefer to split our Roth and traditional 50/50.

2. We could use our brokerage account to pay off mortgage now (3% loan). This would be favorable for student aid, as it would nearly empty the brokerage. Otherwise, we could just paydown the mortgage with regular payments the next 3 years but the brokerage account would show up on FAFSA.>>

KlangFool
I'm not getting it. How would having the 85K each in brokerage accounts instead of 529s change either of these? The first they're worried about switching to Roth retirement vehicles because it would raise AGI and the second they already have enough in their brokerage accounts to pay off the mortgage, so more wouldn't make it more possible to do so.
As a parent of two youngins with 529s, I'm also curious, as it may change my personal trajectory. Would you mind expanding more KlangFool?
esteen,

A) If OP had been maxing up the pre-tax accounts instead of putting the money into the 529, then, the 529 money would not have been existed.

B) Or, OP could do a combination of pre-tax plus Roth over all those years, then, the 529 money would not have existed either.

C) Then, with the brokerage account paying off the mortgage, all parent's asset disappear from FAFSA calculation.

D) 85K + 85K = 170K. Roth IRA contribution over 18 years = 12K X 18 = 216K. OP could use Roth IRA contribution to pay for college education while hidden from FAFSA.

E) 529 is a great tax break for the very rich. As for the rest of us, it is not such a good deal.

KlangFool
Except that 20 years I don’t think the backdoor Roth existed, nor HSA’s nor 403b or 401k’s with Roth options. Back in olden times when I contributed to 529’s I also had a state tax break.

I guess I wouldn’t state that 529’s are just for the ultra-rich. They have helped us provide financial support to college student when our current income is fairly low and our earned income is less than the cost of attendance at the least expensive college in my state.

They are a tool in the toolbox. They might be better used by some people than others. People might use them when there are actually better tools for them. They may still accomplish the goal just fine.
User avatar
Topic Author
fortfun
Posts: 2911
Joined: Tue Apr 19, 2016 7:31 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by fortfun »

Jack FFR1846 wrote: Mon Apr 26, 2021 10:27 am I have a few thoughts.

It depends what colleges you're looking at. As was said at a college finance seminar I went to years ago, Public colleges will look most favorably on your need base, but they have no money to give you. Private colleges have plenty of money to give you but they're going to dig into your home equity, what cars you drive and all your retirement accounts.

You're one of the only posters I've seen in BH who has the possibility of need based aid beyond loans. But you'll need to work at it. It's refreshing to see someone who doesn't start out "We make $350k a year and want to maximize aid....". Anyways, you will want to fill out a test FAFSA form. You'll want to do your homework with colleges being considered to see what they offer. But focus on the the percentages. Worst: Student income, then student assets, then parent income, then parent assets. We too often focus on the easy things....parent assets and pay off the mortgage, buy a Ferrari and put the kids assets into an IRA. Do the forms and look at the colleges.
Thanks Jack!
User avatar
Topic Author
fortfun
Posts: 2911
Joined: Tue Apr 19, 2016 7:31 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by fortfun »

Thanks everyone. Lots to think about here.
Tom_T
Posts: 1592
Joined: Wed Aug 29, 2007 2:33 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by Tom_T »

teen persuasion wrote: Mon Apr 26, 2021 7:27 pm
Tom_T wrote: Mon Apr 26, 2021 1:50 pm
Jack FFR1846 wrote: Mon Apr 26, 2021 10:27 am Private colleges have plenty of money to give you but they're going to dig into your home equity, what cars you drive and all your retirement accounts.
This depends on whether the private college uses FAFSA or CSS (or both.) CSS is much more intrusive in terms of what they want to know. My daughter's college does not use CSS, so my home equity and retirement accounts weren't a factor.

One cute little twist on the two-child thing. If child A is in college, and then child B starts, the EFC for child B will definitely take that into account. But what about child A? The odds are pretty good that child A's college is not going to give you a penny more, even if EFC gets cuts in half. Colleges like to entice "new customers" with aid, but once they have you on board, that's a different story.
The changes to the new FAFSA do away with the multi child discount. It's not EFC (expected FAMILY contribution) anymore, it's SAI (STUDENT aid index). They will not be dividing the end result between number in college, each one in college gets their own calculated number.

Although, to compensate, the income protection number is no longer reduced by a few thousand $ for each extra student. And the base income protection amount is roughly 20% higher than current numbers. But they also eliminated the state tax deduction. :annoyed That was a good 8 or 9% reduction in our total income number (depending on the year).
Thanks, I didn't know that. My daughter has one more year of college, so I'm done with the FAFSA forever. :) But, I still have friends with younger kids, so I'll make sure I don't give them outdated information should they ask.
miamivice
Posts: 2344
Joined: Tue Jun 11, 2013 11:46 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by miamivice »

mmmodem wrote: Mon Apr 26, 2021 8:09 pm
miamivice wrote: Mon Apr 26, 2021 3:07 pm There are a couple potential concerns with the idea of not saving for college. The big one is that if a person is unemployed while the kids are going to college, it's mighty hard to pay the college bills without pulling money from retirement (generally not the best idea). My argument has been to save for known upcoming expenses today to free up future cash flow for other purposes then.
If the money will be used for college whether it is saved in a retirement account or a 529, then it doesn't matter if one is unemployed or if it is generally not the best idea. $66k set aside in a 529 and then spent on college is the same as $66k saved in retirement accounts and then spent on college. It's the same thing. Both options save for an known upcoming expense to free up future cash flow. The preference for the latter is to maximize financial aid.
Can you explain to me how one pulls $66k out of retirement accounts without incurring penalties or taxes? I am familiar with Roth IRA contributions. Have not figured out how other types of retirement money can be used to pay for college without penalty.
miamivice
Posts: 2344
Joined: Tue Jun 11, 2013 11:46 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by miamivice »

miamivice wrote: Tue Apr 27, 2021 10:16 am
mmmodem wrote: Mon Apr 26, 2021 8:09 pm
miamivice wrote: Mon Apr 26, 2021 3:07 pm There are a couple potential concerns with the idea of not saving for college. The big one is that if a person is unemployed while the kids are going to college, it's mighty hard to pay the college bills without pulling money from retirement (generally not the best idea). My argument has been to save for known upcoming expenses today to free up future cash flow for other purposes then.
If the money will be used for college whether it is saved in a retirement account or a 529, then it doesn't matter if one is unemployed or if it is generally not the best idea. $66k set aside in a 529 and then spent on college is the same as $66k saved in retirement accounts and then spent on college. It's the same thing. Both options save for an known upcoming expense to free up future cash flow. The preference for the latter is to maximize financial aid.
Can you explain to me how one pulls $66k out of retirement accounts without incurring penalties or taxes? I am familiar with Roth IRA contributions. Have not figured out how other types of retirement money can be used to pay for college without penalty.
There is always radio silence when I ask that question....
Pdxnative
Posts: 360
Joined: Sat Nov 07, 2015 2:17 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by Pdxnative »

Jack FFR1846 wrote: Mon Apr 26, 2021 10:27 am As was said at a college finance seminar I went to years ago, Public colleges will look most favorably on your need base, but they have no money to give you. Private colleges have plenty of money to give you but they're going to dig into your home equity, what cars you drive and all your retirement accounts.
I think the relevant distinction isn’t so much public vs private but huge endowment vs not. The schools with the best financial aid also have very large endowments. They don’t consider any of those things you list. The next tier down, still with great aid, do consider home equity but they cap the amount that is considered available for college. Most generic “private” colleges do not have large endowments, are highly tuition dependent, and do not offer good need-based aid.

Folks should run the NPCs at schools like Princeton, Stanford, MIT to see the relevant variables and how they impact aid. That’s much more informative than the FAFSA, which is mentioned here on BH all the time but isn’t all that relevant to how aid works at the generous schools.

Oh, and just to agree with those pointing this out: the dogma that aid=loans is absolutely untrue at schools with good aid.
miamivice
Posts: 2344
Joined: Tue Jun 11, 2013 11:46 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by miamivice »

Pdxnative wrote: Tue Apr 27, 2021 12:32 pm Oh, and just to agree with those pointing this out: the dogma that aid=loans is absolutely untrue at schools with good aid.
When I say that the vast majority of need based financial aid is distributed in the form of loans rather than grants, I'm not referring to any specific college. Rather, I am saying that if one looks at the total pot of need based aid across all colleges (community colleges, 4 year universities, privates, elite privates) in the US, I am pretty sure that the majority is loans rather than aid.

I understand some elite privates with large endowments are the exception to the rule, but I don't think that grants instead of loans is true at the majority of US colleges.
User avatar
mmmodem
Posts: 2416
Joined: Thu May 20, 2010 1:22 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mmmodem »

miamivice wrote: Tue Apr 27, 2021 10:16 am Can you explain to me how one pulls $66k out of retirement accounts without incurring penalties or taxes? I am familiar with Roth IRA contributions. Have not figured out how other types of retirement money can be used to pay for college without penalty.
https://www.madfientist.com/how-to-acce ... nds-early/
Plenty of ways.
User avatar
TomatoTomahto
Posts: 12369
Joined: Mon Apr 11, 2011 1:48 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by TomatoTomahto »

miamivice wrote: Tue Apr 27, 2021 12:37 pm I understand some elite privates with large endowments are the exception to the rule, but I don't think that grants instead of loans is true at the majority of US colleges.
I understand, but I think some readers might be misled by equations that lack nuance, like “aid=loans.”

That’s especially the case for some lower to middle income families, where an elite private is probably much more affordable than an instate public. Of course, as always, the trick is to be accepted.
I get the FI part but not the RE part of FIRE.
Independent George
Posts: 1248
Joined: Wed Feb 17, 2016 12:13 pm
Location: Chicago, IL, USA

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by Independent George »

miamivice wrote: Tue Apr 27, 2021 12:37 pm
Pdxnative wrote: Tue Apr 27, 2021 12:32 pm Oh, and just to agree with those pointing this out: the dogma that aid=loans is absolutely untrue at schools with good aid.
When I say that the vast majority of need based financial aid is distributed in the form of loans rather than grants, I'm not referring to any specific college. Rather, I am saying that if one looks at the total pot of need based aid across all colleges (community colleges, 4 year universities, privates, elite privates) in the US, I am pretty sure that the majority is loans rather than aid.

I understand some elite privates with large endowments are the exception to the rule, but I don't think that grants instead of loans is true at the majority of US colleges.
Except what we need is the disaggregated data based on the individual family's AGI/Assets, which (as far as I know) is not available. Anecdotally, though, from what I've seen, the lower your income/assets, the higher the percentage of aid is on need-based grants. More importantly, this is absolutely something you can shop around & negotiate for.
cshell2
Posts: 639
Joined: Thu May 09, 2019 10:29 am

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

mmmodem wrote: Tue Apr 27, 2021 12:42 pm
miamivice wrote: Tue Apr 27, 2021 10:16 am Can you explain to me how one pulls $66k out of retirement accounts without incurring penalties or taxes? I am familiar with Roth IRA contributions. Have not figured out how other types of retirement money can be used to pay for college without penalty.
https://www.madfientist.com/how-to-acce ... nds-early/
Plenty of ways.
Those two examples didn't seem particularly helpful for me for using retirement money for paying for college because they both started with Step 1. When you quit your job.

I'm not going to quit my job to set up a Roth Conversion ladder or 72t withdrawals to pay for college.
User avatar
mmmodem
Posts: 2416
Joined: Thu May 20, 2010 1:22 pm

Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mmmodem »

cshell2 wrote: Tue Apr 27, 2021 12:51 pm
mmmodem wrote: Tue Apr 27, 2021 12:42 pm
miamivice wrote: Tue Apr 27, 2021 10:16 am Can you explain to me how one pulls $66k out of retirement accounts without incurring penalties or taxes? I am familiar with Roth IRA contributions. Have not figured out how other types of retirement money can be used to pay for college without penalty.
https://www.madfientist.com/how-to-acce ... nds-early/
Plenty of ways.
Those two examples didn't seem particularly helpful for me for using retirement money for paying for college because they both started with Step 1. When you quit your job.

I'm not going to quit my job to set up a Roth Conversion ladder or 72t withdrawals to pay for college.
Cash flow first. Stop contributing to retirement accounts as necessary if you are still working. Use Roth IRA contributions as necessary. If you are unemployed, then consider using other retirement accounts to pay for college.
Post Reply