Can A Rollover IRA Affect College Aid?

by Todd Weaver on May 28, 2013

IRS buildingThe IRS Data Retrieval Tool – aka: the electronic relationship between the Internal Revenue Service and the Department of Education, is supposed to make things easier for families applying for financial aid.

Unfortunately, that is not always the case.

A parent of a college-bound student told me they lost a great deal of financial aid eligibility when their FAFSA form was updated with the data from their now completed tax return.

It turns out the family had an Adjusted Gross Income of less than $50,000 per year, but a rollover of $67,000 from their 401(k) into a traditional IRA.

While the rollover is non-taxable, the IRS requires that it be listed on the tax return in the year it took place.

For tax purposes, this line item on the IRS Form 1040, remains untaxed when it is verified as a rollover into a qualified retirement account.

However, the IRS Data Retrieval Tool is not sophisticated enough to understand that “untaxed income” in the form of a rollover, is not to be passed along to the college financial aid offices.

The data were transferred right from the tax return, and the college saw the Adjusted Gross Income shoot up to a number over $100,000! Of course, that was far from the real income for this family, that had also seen a job loss and high medical bills hurt their financial strength last year.

Fortunately for this family, they noticed the dramatic change in their financial aid eligibility!

If they had not noticed, then the college would have assumed the data from the IRS were accurate and thus, would have adjusted the financial need of the family is such a significant way, that the student would be subject to a much greater financial burden than they should be.

The next step for this family is to contact the financial aid officer at the college, and let them know what happened. Explaining the financial situation directly to the school, will allow this family to have the student’s account fixed and reset to the proper amount of aid eligibility.

Check the numbers, check the numbers, then check the numbers one more time! Be vigilant in monitoring the financial aid awards your student is eligible for and is actually receiving. No one else will do it for you.

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{ 3 comments… read them below or add one }

Jay Castro May 29, 2013 at 11:40

Todd:
The fact pattern you suggest may very well be true but it seems odd. A rollover would not impact AGI on the 1040. I wonder if this was a taxable rollover to a ROTH IRA? However, your ultimate message to verify all #s is not lost.

Todd Weaver May 29, 2013 at 11:40

Jim, great comment. Yes, the AGI would not be affected on the 1040 but the data is pulled directly from the IRS into the FAFSA form, and the FAFSA form simply looks at the $67K (rollover) as income.

Lawrene Bottorf May 29, 2013 at 11:40

And that is why parents need to hire professionals who know what they are doing. :)

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