How Do Distributions from a Roth IRA Affect the FAFSA?
Distributions from a Roth IRA are reported as income on the FAFSA, including a tax-free return of contributions. The distributions are reported as taxable income or untaxed income, depending on whether they are included in adjusted gross income (AGI) or not.
Distributions from a Roth IRA are tax-free if the account owner is age 59-1/2 or older and has been invested for at least five years.
The earnings portion of a distribution prior to age 59-1/2 is taxable and may also be subject to a 10% tax penalty. The tax penalty is waived if the distribution pays for educational expenses.
A return of contributions from a Roth IRA is tax-free.
The full amount of the distribution is counted as income on the FAFSA, as part of adjusted gross income (AGI) or as untaxed income, as appropriate. In particular, a tax-free return of contributions from a Roth IRA is reported as untaxed income on the FAFSA.
Both adjusted gross income and untaxed income function the same on the FAFSA, as part of total income.
Since income on the FAFSA is reported based on the prior-prior year, a Roth IRA distribution received prior to January 1 of the sophomore year in high school will not be reported on the FAFSA.
Likewise, a distribution from a Roth IRA on or after January 1 of the sophomore year in college will not be reported on the FAFSA if the student graduates in four years. If the student graduates in five years, distributions on or after January 1 of the junior year in college will not be reported on the FAFSA.
If it is unclear how long it will take the student to graduate, it may be best to wait until after the student graduates to take a tax-free return of contributions from the Roth IRA and use it to pay down student loan debt.
- Can a Roth IRA Be Used to Pay for College?
- Can I Use Last Year’s Taxes on this Year’s FAFSA?
- Complete Guide to Financial Aid and the FAFSA
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