In my experience, most parents believe that once their child has started college and received her financial-aid offer, they can stop paying attention to future financial aid requests. Often overlooked is that financial-aid offers generally are in effect for one academic year and must be renewed every year. Simply put, families must reapply for financial aid each year a child will be in college.
Making a single incorrect financial decision during your child’s college years could upend years of proper planning. These are some of the most common mistakes that should be avoided:
For a ROTH Individual Retirement Account distribution, a similar policy applies. There would be no penalties incurred or income tax due, but the distribution would be considered non-taxed income on the following year’s Free Application for Federal Student Aid form and could potentially decrease your potential financial aid.
Under both of these scenarios, the withdrawal of funds from your traditional or ROTH Individual Retirement Account would increase your total income (taxable and non-taxable). This would increase the amount of your Expected Family Contribution and could decrease the amount of aid you might receive.
That means that the base year now runs from the second half of your child’s high school sophomore year through to the first half of the student’s junior year. Put another way, the base year is the calendar year before a student enters his senior year of high school. Parents who have invested for years in stocks, mutual funds, and other investments who plan to liquidate these assets to pay for college need to take special care of the timing of the sale of these assets. Depending on when assets are sold, this could affect the amount of aid available to your child in future years. Why? Because when an investment is sold, and a capital gain is realized, that gain will be included in the parent’s following year income tax return. That capital gain amount will increase the parent’s earning and thus their contribution number.
A 529 plan owned by grandparents is a useful college-planning tool. Assets in a grandparent-owned 529 plan are not reported on the Free Application for Federal Student Aid, but some colleges may ask a student to include them in the College Scholarship Service Profile, the financial aid division of the College Board. Research the difference when applying for financial aid.
When a grandparent withdraws funds from a 529 plan to pay for a grandchild’s tuition, that amount is reportable the following year as the student’s non-taxable income on the application. The student’s non-taxable income would increase the amount of his Expected Family Contribution, which could lower the amount of aid available to him. The best advice here is to have open conversations with your child’s grandparents in order to best coordinate timing to maximize financial-aid benefits.
Planning for college costs is an ongoing process. One simple mistake or oversight could ruin years of savings and careful planning. Consult with me, another financial advisor, or your accountant for advice before making a costly mistake.
Anthony N. Corrao is president of wealth management and director of corporate education at Manhattan Ridge Advisors. For more than 25 years, he has helped families towards their financial goals by developing financial, educational, and retirement-planning strategies.
The information is intended for informational purposes only, and is not intended to be a substitute for specific tax, legal or investment advice. Securities offered through First Allied Securities Inc., a registered broker dealer. Member FINRA/SIPC. Advisory services offered through First Allied Advisory Services, a registered investment adviser.