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Beware Rollovers and Retirement Account Withdrawals

We are seeing an ever increasing number of IRA rollovers and retirement account withdrawals. A few thoughts about each of them.

Rollovers typically do not affect financial aid adversely as it is a tax-free event. If taxpayers receive a check, they have 60 days to deposit it into another qualified retirement plan. No harm, no foul…unless it is converted to a Roth IRA. That is a taxable event which can drive up the taxpayer’s Adjusted Gross Income and thus the student’s Expected Family Contribution (EFC) under the federal financial aid formula. What to do in this event? Ask the financial aid director at the college or university the student wants to attend or is attending to see if she or he will make a “professional judgment” to reverse the adverse effect when it comes to the student’s financial aid offer. (After all, the money is going from one retirement account into another.) This decision is at the sole discretion of the chief financial aid administrator, so you likely will need to provide the financial details before the professional judgment decision is made.

Retirement Account Withdrawals seem to be more frequent among our client families. They are taking money out because of the lost income from a parent losing a job, or to pay for home repairs, medical bills, credit card or student loan debt, etc. Again, you can ask the financial aid director at the college or university the student wants to attend or is attending to see if he or she will make a “professional judgment” to reverse the adverse effect when it comes to the student’s financial aid. Again, this decision is at the sole discretion of the chief financial aid administrator. Not all retirement accounts have this option, but before you withdraw money from a retirement account you may want to see if your account offers the option of a loan. You could salvage your retirement account and also have the extra funds to meet today’s college or other expenses.

We recommend that you talk with your tax preparer and/or a financial advisor to sort out all of the trade-offs with the above moves.

 


Publication Date: May 2018

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