Are Investments Factored into Financial Aid on the FAFSA?
Some types of student and parent investments are reported on the Free Application for Federal Student Aid (FAFSA) and some are not. Money in qualified retirement plans, small businesses owned and controlled by the family, and net home equity for the family home are not reported on the FAFSA. There are also differences in the reporting of assets and the reporting of contributions and distributions as income.
Reporting of Investments as Assets
Some investments are reportable as assets on the Free Application for Federal Student Aid (FAFSA) and some are not.
- College savings. Money in 529 college savings plans, prepaid tuition plans, and Coverdell education savings accounts are reported as assets on the FAFSA.
- Other investments. Money in bank and brokerage accounts, UGMA and UTMA accounts, certificates of deposit (CD), stocks, cash stuffed in a mattress, trust funds, money market funds, mutual funds, stock options, bonds, other securities and commodities are reported as assets on the FAFSA.
- Real estate. Investments in real estate (other than the family home or a family farm in which the family resides), businesses (including sole proprietorships and partnerships) and rental properties must also be reported as assets on the FAFSA.
- Retirement plans. Qualified retirement plan accounts, such as a 401(k), Roth 401(k), IRA, Roth IRA, pension, qualified annuity, SEP, SIMPLE or Keogh plan, are not reported as assets on the FAFSA.
- Excluded assets. The net worth of the family home, a family farm and a small business that is owned and controlled by the family is not reported as an asset on the FAFSA.
The intended use of the money does not matter. Money that is not in a qualified retirement plan is reported as an asset on the FAFSA, even if it is intended for retirement and even if the account owner is already retired. Similarly, if the family just sold their home, the net proceeds of the sale must be reported as an asset on the FAFSA even if the family intends to use the money to buy a new home.
Reporting of Investments as Income
Contributions to and distributions from retirement plans may be reported as untaxed income on the FAFSA, even if the retirement plan is not reported as an asset on the FAFSA.
- If a voluntary contribution to a qualified retirement plan is excluded from income, such as a pre-tax contribution to a 401(k), the contribution is reported as untaxed income on the FAFSA. This prevents a family from artificially reducing their income by increasing contributions to their retirement plans.
- Involuntary contributions to retirement plans, such as contributions to the IPERS (Iowa), KPERS (Kansas) and OPERS (Ohio) public employee retirement systems, are not reported as untaxed income on the FAFSA. This is in contrast with contributions by federal employees to the Thrift Savings Plan (TSP), which are voluntary and therefore must be reported as untaxed income on the FAFSA like contributions to a 401(k), 403(b) or IRA.
- Distributions from a retirement plan are also reported as untaxed income on the FAFSA to the extent not already included in adjusted gross income (AGI). For example, a tax-free return of contributions from a Roth IRA is reported as untaxed income on the FAFSA.
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