Financial Thread

[DeftOne]

So does a kid have to count a Christmas check from Uncle Jim as income on the FAFSA? No?

What if Uncle Jim got that money out of his Roth IRA? How would the kid know if Uncle Jim doesn't tell him?

I think the rule for the kid to count it as income is assuming the Roth money came from earnings, not contributions.

I've found multiple sources that say otherwise.

For instance, from http://www.finaid.org/savings/retirementplans.phtml :

• If you limit your withdrawals from a Roth IRA to just the contributions, the distribution is tax and penalty free when used for qualified higher education expenses.
  • Although the amounts in a traditional IRA are sheltered from need-based financial aid, the amounts withdrawn may count as income and affect eligibility for need-based financial aid during the next year. (If the distribution is tax-free, it counts as untaxed income and still impacts the need analysis process.)

There are several other sites out there that say the same thing. Obviously I can't vouch for whether or not the information is factual (that's why I asked the question about this in the first place).

 

[Tailg8er]

I've found multiple sources that say otherwise.

For instance, from http://www.finaid.org/savings/retirementplans.phtml :


There are several other sites out there that say the same thing. Obviously I can't vouch for whether or not the information is factual (that's why I asked the question about this in the first place).

Are contribution withdrawals from a Roth IRA taxed or penalized if you use them for something other than education? I was under the impression they were not. So I don't understand why they're specifically saying if they're used for education they're tax & penalty free. I thought all contribution withdrawals were tax & penalty free...

 

[DeftOne]

Are contribution withdrawals from a Roth IRA taxed or penalized if you use them for something other than education? I was under the impression they were not. So I don't understand why they're specifically saying if they're used for education they're tax & penalty free. I thought all contribution withdrawals were tax & penalty free...

Yeah, they got that part wrong on that particular site. All contribution withdrawals are tax free (assuming the Roth is at least 5 years old), even before age 59 1/2.

 

[Gunnerclone]

Are contribution withdrawals from a Roth IRA taxed or penalized if you use them for something other than education? I was under the impression they were not. So I don't understand why they're specifically saying if they're used for education they're tax & penalty free. I thought all contribution withdrawals were tax & penalty free...

No. That's why I said deft is getting lost in the verbiage.

 

[Tailg8er]

No. That's why I said deft is getting lost in the verbiage.

That's what I thought.

It would make zero sense for Roth contribution withdrawals to count as student income anymore than any gift or other already-taxed money.

 

[Gunnerclone]

That's what I thought.

It would make zero sense for Roth contribution withdrawals to count as student income anymore than any gift or other already-taxed money.

Honestly the best thing if you were not an older parent would to be have a grandparent get on the Roth right away. After 59 1/2, it's all in play.

 

[ianoconnor]

Maybe.

In what scenario would it be more tax advantageous to go with the Roth route vs. 529 (assuming we're talking about an Iowa resident)?

 

[DeftOne]

No. That's why I said deft is getting lost in the verbiage.

I understand the difference between Roth IRA contribution withdrawals and earnings withdrawals, and the associated tax implications to the Roth holder. The issue I'm trying to get cleared up is how a parent's Roth IRA withdrawals that are applied to a child's education affect the child's financial aid eligibility. If what I'm reading is factually correct, then the negative impact on a child's financial aid eligibility from the Roth IRA is something that needs to be factored in to the choice between going with a 529 or a Roth.

 

[Gunnerclone]

I understand the difference between Roth IRA contribution withdrawals and earnings withdrawals, and the associated tax implications to the Roth holder. The issue I'm trying to get cleared up is how a parent's Roth IRA withdrawals that are applied to a child's education affect the child's financial aid eligibility. If what I'm reading is factually correct, then the negative impact on a child's financial aid eligibility is something that needs to be factored in to the choice between going with a 529 or a Roth IRA.

This is what I'm saying. If you just take a "withdrawal", it has no impact. If you take a "educational expense withdrawal" it has an impact. These are two different things. Taking a "withdrawal" and using it to pay for education is NOT the same thing as taking a "educational expense withdrawal". In the first you are not accessing any type of special provision of a Roth IRA. In the second you are. You can take the first type of withdrawal and use it for education expenses no questions asked.

The first is not giving you any benefit, if you take a withdrawal pro-rated from contributions and earnings or all earnings and are under 59 1/2 or have not met the 5 year threshold you will get a penalty; NO SPECIAL CONSIDERATIONS.

The second the GOVERNMENT IS GIVING YOU A BENEFIT so they expect a consideration in return (the impact on the Financial aid award) by not applying that 10% penalty if you were to take a withdrawal pro-rated from contributions and earnings or all earnings.

 

[DeftOne]

That's what I thought.

It would make zero sense for Roth contribution withdrawals to count as student income anymore than any gift or other already-taxed money.

Again, I've found multiple sources that say otherwise. Roth withdrawals, even if they are contribution withdrawals and thus tax free to the Roth holder, still count as student income on the FAFSA.

From another site: https://www.edvisors.com/education-tax-benefits/retirement-savings/roth-ira/

A tax-free return of contributions is reported as untaxed income on the Free Application for Federal Student Aid (FAFSA) and other financial aid application forms (such as the CSS/Financial Aid PROFILE form). Untaxed income is added to AGI to yield total income. As much as half of total income will increase the expected family contribution (EFC).

It's still unclear to me if this only applies to a Roth contribution withdrawal from a student-held Roth, or if it would also apply to a parent-held Roth contribution withdrawal applied to the child's education.

 

[Gunnerclone]

I'm not following you any longer. Why would you take out the withdrawal from the Roth PRIOR to submitting the FAFSA?

 

[DeftOne]

I'm not following you any longer. Why would you take out the withdrawal from the Roth PRIOR to submitting the FAFSA?

You know, that's a great point that I clearly overlooked. If you wait until the student is done with college (or even their last year of college) to take a Roth withdrawal it wouldn't affect their FAFSA application at all. Problem solved. Thanks!

EDIT: You know what's funny...if I had just read the next paragraph in that last site I referenced, I would have found this out a little quicker on my own. Stay in school, kids.

 

[ArgentCy]

Again, I've found multiple sources that say otherwise. Roth withdrawals, even if they are contribution withdrawals and thus tax free to the Roth holder, still count as student income on the FAFSA.

From another site: https://www.edvisors.com/education-tax-benefits/retirement-savings/roth-ira/



It's still unclear to me if this only applies to a Roth contribution withdrawal from a student-held Roth, or if it would also apply to a parent-held Roth contribution withdrawal applied to the child's education.

A withdrawl from my account can NOT possibly be counted as one of my kids income. What if I used the money to go on a binge in Vegas. Or which kids income should it be attributed. Just doesn't make any sense. They do require some sort of disclosure of parent's assets but I can't see any other use.

That rule appears to apply to a Roth withdrawal if it is in the kids name and one reason I have seen that a 529 is superior to a Roth in the kids names.

 

[DeftOne]

A withdrawl from my account can NOT possibly be counted as one of my kids income. What if I used the money to go on a binge in Vegas. Or which kids income should it be attributed. Just doesn't make any sense. They do require some sort of disclosure of parent's assets but I can't see any other use.

This is all moot now given my recent revelation of a work-around (see above), but what you've described is not really what I was asking. A parent's withdrawal applied to a Vegas binge is not the same thing as a withdrawal used for a student's education when it comes to reporting the student's income.

 

[ArgentCy]

How on earth will they know what it's used for? You don't have to tell the IRS why your taking contributions out of your Roth.

It becomes my money after withdrawing and there is no difference between choosing to help my son with expenses or going on vacation. Or put another way, what if I just gave my kid $3,000 because I made a bunch of money this year and it wasn't coming from a retirement account.

 

[cyfan92]

Does anyone have personal experience with Ally Bank online savings accounts??? Do you recommend the experience or prefer other options?

 

[allday4cy]

Does anyone have personal experience with Ally Bank online savings accounts??? Do you recommend the experience or prefer other options?

I recommend Ally. I have been with them since they started and no complaints. I have a couple savings accounts with them and 2 CD's.

 

[NATEizKING]

Best Vanguard Roth 401k fund for someone that will be working 30+ more years?

 

[KnappShack]

When 2008 decided to kick me in the nuts I was making less than half of my prior salary and holding a sizeable mortgage.

So I lived on $300/mo to eat, entertain, and clothe myself. Like my depression era granddaddy I live like I could lose my job tomorrow.

 

[LarryISU]

Best Vanguard Roth 401k fund for someone that will be working 30+ more years?

So many funds that to say which is best is highly subjective. I put IRA money into Vanguard Health Care 17 years ago and have a 450% return so far. It just goes up steadily year after year, although past results are not a guarantee of future continued growth obviously.