The Free Application for Federal Student Aid (FAFSA) determines eligibility for need-based financial aid for college. For the past few years, the FAFSA has asked families annually how much they contribute to an employer-sponsored retirement account such as a 401(k) and factored it into the household’s annual gross income, reducing eligibility for need-based aid. Ta.
That is changing. Under new rules on the FAFSA form, pre-tax contributions to a workplace retirement plan will no longer count as income. This means possible expansion of financial aid. Learn how families can take advantage of this change to prioritize both retirement savings and college cost budgeting.
How the new FAFSA rules affect your retirement planning
For the past few years, the FAFSA has required families to report retirement contributions that are factored into their gross income. That meant the funds were less likely to receive need-based aid. That all changed with the redesigned FAFSA, which removed questions about tax-deferred pension and tax-free payments to retirement savings plans. These changes are FAFSA Simplification Method Fast forward to 2020.
This change means that with proper planning, a 401(k) can provide retirement security for both. and As reported on the FAFSA, pre-tax savings through your employer can be an effective way to reduce your gross income, which can help increase your financial aid eligibility. In other words, you may no longer have to face a strict “either-or” decision about whether to invest in your child’s college or your retirement plan. While some colleges have alternatives to the FAFSA, this change will open up more options for many families looking to strategically leverage their retirement savings. .
One way to simplify the FAFSA process is to pull more information directly from your tax documents. However, the FAFSA collects that tax information from: 2 years Therefore, increasing contributions to your retirement account this year will not affect the financial aid awarded for the 2024-25 academic year, but it will affect the 2025-26 academic year.
The redesigned FAFSA is Scheduled to be released in December 2023 For the 2024-25 school year.Here’s how to do it Start preparing now Apply for federal student aid in December.
