Why Your 2015 IRA Contribution Will Hurt Your Children’s 2016-2017 College Aid

College aid is a huge help for students to afford college. You probably need it to help them get a good standard of living while they are studying in higher education. But your IRA contributions for 2015 may ruin their ability to receive the funding they need.CollegeMoneyPic

This article will explain why.

The Formulas

There are formulas used to calculate whether someone is eligible for college aid, and to how much they are entitled. Unfortunately, it depends on parental household income. These formulas incorporate IRA contributions into the formula, even if for tax purposes they are made exempt.

This means your IRA contributions could prevent your children from gaining the financial aid they need.

Assets in the Plan

On the other hand, the assets already in your plan will not be used within the formula. This is a message that starting to save early will ultimately make it easier for you to deal with things later on. Those in the worst position are parents trying to make ‘catch up’ contributions to make up for lost time.

Is it Worth It?

You may be in a position where you have to choose between IRA contributions and college aid. For many parents, they will reason that they won’t have to pay off the student debt anyway so it’s not their problem. This is really a matter of your personal situation.

Richer families may be able to get away without worrying about college aid, whereas poorer families may choose to decline making IRA contributions, at least for a year or so in order for their children to qualify.

Image credit: F Delventhal

About the author

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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