Retirement Savings May Affect Financial Aid
Many Americans need help when faced with a major expense or financial hardship. Whether it’s paying for college, healthcare, food, or living expenses, they may seek financial aid through a federal program. Depending on the program and the financial help needed, having money in a retirement savings account may affect how much financial assistance an individual receives.
Student Financial Aid
For many individuals, financial aid is necessary when paying for higher education. When applying for financial assistance from the U.S. Department of Education Office of Federal Student Aid, the largest provider of student financial aid in the nation, an applicant is required to report many types of assets (the parents’ and the student’s). Those applying may wonder whether retirement savings accounts are included in these reportable assets. The answer depends on the formula used to determine how much financial aid the student is eligible to receive.
Balances in employer-sponsored retirement plans and IRAs generally are not included in the calculation. Whereas, nonretirement account balances, such as checking, savings, CDs, brokerage accounts, stocks, bonds, mutual funds, etc., are included. In essence, the balance in a retirement plan or IRA—whether owned by the parent or the student—is not counted. But any contributions to a retirement plan or IRA for the tax year of which asset information is gathered are counted. According to the Federal Student Aid worksheets, “2018-19 Completing the FAFSA” and “The EFC Formula, 2018-2019,” contributions to pension, profit-sharing, 401(k), 403(b), SEP, and SIMPLE IRA plans and Traditional and Roth IRAs are viewed as untaxed income, and must be added back to the parent’s or student’s adjusted gross income portion of the calculation.
Any distributions from these plans or IRAs during a year that is referenced for the FAFSA are counted as income and are reportable assets, according to www.savingforcollege.com. This is something to keep in mind when contemplating an IRA distribution or preparing to withdraw from a retirement plan during college years. Even distributions taken to pay for higher education expenses are counted as part of the student’s income for the next financial aid eligibility year.
Welfare and Medical Aid
How does having an IRA or retirement plan affect one’s ability to qualify for other types of financial aid? It depends on the federal program and the state in which the individual is applying for program benefits. For federal programs that help low-income Americans, such as Medicaid or the Children’s Health Insurance Program (CHIP), Temporary Assistance to Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP), and Supplemental Security Income (SSI), each state is allowed to establish asset limits. These are the maximum dollar amounts of select types of assets that the applicant may own and still qualify for the aid program.
Certain resources, such as retirement accounts, may be included in the program’s asset and income limitations. For example, a state may set a dollar limit of $2,000 for retirement savings accounts. Thus, the applicant must have no more than $2,000 total in all of her retirement savings vehicles to qualify for federal assistance. In this case, saving for retirement could jeopardize the individual’s eligibility for the program. Keep in mind that there are variations and exceptions that the individual should pay close attention to.
Most states generally do not count employer-sponsored retirement plans, such as a 401(k) plan, in the asset limit because the account is not easily accessible to the needy individual; a triggering event is needed to withdraw money. IRAs, on the other hand, which do not require a triggering event, are more likely to be counted in the asset limit. A typical rule among states is to count an IRA if it is not in required minimum distribution (RMD) status. For example, a Traditional IRA owner who is not yet required to take RMDs may have to include his IRA balance as part of his assets when applying for a low-income government program, while someone who is taking RMDs may not. But any RMDs taken would be counted. Another common rule is to count the IRA if the IRA owner is age 59½ or older and the early distribution penalty tax no longer applies.
Look to Program Rules and State Guidance
Saving for retirement often takes a backseat to one’s current financial circumstances. Money set aside for retirement tends to be used for other more immediate needs. But, depending on program and state requirements, those who qualify for certain federal programs may not have to sacrifice their hard-earned retirement savings.