new FAFSA (2024-on) and roths, zero sai

[moustachebar]

If the FAFSA continues to be a thing, I'd like to understand it a bit better. I found a great calculator that lets you envision various scenarios.

https://mycollegecorner.com/calculator/financial-aid-calculator/

It appears that for income, pulling contributions from Roth IRA is called untaxed income. Doing a conversion itself is also income.

I think this means that doing both in one year, as one would in a Roth ladder scenario, would lead to FAFSA treating both as income at once.

So a SEPP would be better during these years I think... You don't want to be taking from the Roth without refilling it, and doing a conversion doesn't get you cash flow to live on.

True?

I have also seen reference to a provision that if income is less than or equal to 175% FPL, one is eligible for maximum pell grant, and assets are not considered. Elsewhere I have seen it as 135% or something. Either way, this is not something the calculator can reproduce. Has anyone actually witnessed this happening? How does it work? You're going along entering info and suddenly angels sing and the assets field grays out?

[secondcor521]

Roth conversions count as income on the FAFSA.  But there is an obscure provision, GEN-99-10, which allows you to appeal to a financial aid officer and they will remove the Roth conversion from income and refigure federal financial aid.  See:

https://fsapartners.ed.gov/knowledge-center/library/dear-colleague-letters/1999-03-10/gen-99-10-students-receiving-preparation-compete-and-succeed-twenty-first-century-workplace

Pulling contributions from a Roth IRA should not be included on the FAFSA.  So your conclusion is inaccurate.

As to your last paragraph, yes, for an MFJ family, if your AGI is 175% of FPL or less, the student will qualify for maximum Pell grant.  This provision is part of the new FAFSA rules which are now in effect.

I'm not sure about the 135% number.  That's not a thing as far as I know.  There are other ways to qualify for maximum Pell, but 175% of FPL is the most straightforward and most commonly known.

And yes, it works as you describe.  When you are completing the actual FAFSA online, you enter the income information first.  If you meet the appropriate qualifications to be exempt from asset reporting, the online FAFSA process will say something like "You don't have to enter assets unless you want to.  Do you want to?"  I always answered no to that question and we just skipped entering asset information.

Actually, the previous paragraph was my experience with my kids, the last of whom finished college a year or so before the new FAFSA rules.  So it's possible that the system works differently now, but I highly doubt it.  Why waste everyone's time collecting asset info if it's not required?

[moustachebar]

Thanks for your reply! I saw your advice to others including the dear colleague letter and should have mentioned that.

I keep reading this and coming away with my previous understanding, I can't seem to read it correctly:

"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."

https://web.archive.org/web/20250404060823/https://www.savingforcollege.com/article/how-do-distributions-from-a-roth-ira-affect-the-fafsa

How am I messing this up? Are there even separate places to enter the AGI and untaxed income? On the calculator there is.

I am a couple years out from FAFSA prior prior but want to have a plan as well as time to understand it wrong a few times!

[secondcor521]

Thanks for your reply! I saw your advice to others including the dear colleague letter and should have mentioned that.

I keep reading this and coming away with my previous understanding, I can't seem to read it correctly:

"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."

https://web.archive.org/web/20250404060823/https://www.savingforcollege.com/article/how-do-distributions-from-a-roth-ira-affect-the-fafsa

How am I messing this up? Are there even separate places to enter the AGI and untaxed income? On the calculator there is.

I am a couple years out from FAFSA prior prior but want to have a plan as well as time to understand it wrong a few times!

It turns out I was wrong.  I should have researched it first.  I never did a Roth distribution as part of a Roth ladder or otherwise when my kids were in college, so I wasn't 100% familiar with the rules.

I went and looked at the actual FAFSA simplification law to see, and it does seem that "untaxed portions of IRA distributions" would be included in untaxed income, which is included in total income.  See https://www.law.cornell.edu/uscode/text/20/1087vv.

Normally what I did was allow the FAFSA application to log in to the IRS and pull the information directly from my tax return.  It's faster, easier, and more accurate to do it that way.  It appears that for the income you're wondering about, it ends up including in untaxed income the amount on Line 4a minus the amount on Line 4b of your 1040.  I'm not sure, but I think a Roth distribution of contributions would show up in that way.

As a side note, you could always do a practice FAFSA with the real FAFSA website and see how it actually works.  If you don't send it to any schools, it won't have any consequences that I know of.

As another side note, I would not recommend trusting any web page with FAFSA information which is more than a year or two old unless it's clear that it refers to the new FAFSA rules.  There are just too many differences between the old and the new rules to rely on any of the old information.  The link you provided relates to old FAFSA rules - it happened to be accurate but you really can't rely on that as a general rule.

You're smart to start early.

[moustachebar]

Thanks for looking at it, my eyes glazed after awhile and also it's a very old link so I didn't quite trust it. Also for the awesome law link, and for the other advice. Totally agree there is tons of old stuff. Luckily Mark Kantrowitz has been writing a bunch recently but hadn't revisited this yet.

I will think about starting one just to get comfortable. My plan had been to do small Roth conversions and pull from Roth for any excess but that's looking like a no go. Also want to keep the Roth as intact as possible.

What did you use the dear colleague letter to pull from?

[secondcor521]

Thanks for looking at it, my eyes glazed after awhile and also it's a very old link so I didn't quite trust it. Also for the awesome law link, and for the other advice. Totally agree there is tons of old stuff. Luckily Mark Kantrowitz has been writing a bunch recently but hadn't revisited this yet.

I will think about starting one just to get comfortable. My plan had been to do small Roth conversions and pull from Roth for any excess but that's looking like a no go. Also want to keep the Roth as intact as possible.

What did you use the dear colleague letter to pull from?

I'm not sure I'm reading your question clearly.  But I think this may answer it:

I was doing Roth conversions while my kids were in college.  Every year, we'd fill out the FAFSA, and the Roth conversion would be included in my income, as you would expect.  I then would appeal to the financial aid officer and reference the Dear Colleague letter, and they'd refigure my kids' aid package as though that Roth conversion income didn't exist.

From a larger picture, I was planning on doing a Roth conversion ladder, but I had unexpected income so I never had to actually use the ladder to withdraw from my Roth.  I still do Roth conversions, but those are now just for tax rate arbitrage and estate planning reasons, not for cash flow.

[moustachebar]

You got the meaning of the question exactly. Thank you. I had ended up confused between the Roth conversion and the non ladder. I do it all the time unfortunately... why I'm starting to think about it now, to try to get all the kinks out of my understanding. Thanks again!

[yachi]

It appears that for the income you're wondering about, it ends up including in untaxed income the amount on Line 4a minus the amount on Line 4b of your 1040.  I'm not sure, but I think a Roth distribution of contributions would show up in that way.

That's where they showed up when I withdrew Roth IRA contributions, and did a Roth conversion in the same year.  Turbotax added all the distributions into 4a, and 4b had only the taxable portion.

Since I have a High School Freshman, it looks like next year will be my first FAFSA year.  Then it's almost every year for the next 15 because of the age of our kids. 

This is my 4th year FIRED, and we've been doing Roth conversions for two reasons: 1) So that we can vary the withdrawal amount year to year and 2) because low rates and low age meant the withdrawal rate using SEPP wasn't attractive.

It looks like if I want to stay FIRED are switching to SEPP for withdrawals.  Do you think petitioning the financial aid officer to remove the Roth conversion from income and refigure federal financial aid would work if our only remaining "income" is the untaxed Roth distributions?

[pdxvandal]

If you have a HS freshman, I believe you'd want to begin applying in October 2027, slightly less than one year before he/she would enter college.

[secondcor521]

It appears that for the income you're wondering about, it ends up including in untaxed income the amount on Line 4a minus the amount on Line 4b of your 1040.  I'm not sure, but I think a Roth distribution of contributions would show up in that way.

That's where they showed up when I withdrew Roth IRA contributions, and did a Roth conversion in the same year.  Turbotax added all the distributions into 4a, and 4b had only the taxable portion.

Since I have a High School Freshman, it looks like next year will be my first FAFSA year.  Then it's almost every year for the next 15 because of the age of our kids. 

This is my 4th year FIRED, and we've been doing Roth conversions for two reasons: 1) So that we can vary the withdrawal amount year to year and 2) because low rates and low age meant the withdrawal rate using SEPP wasn't attractive.

It looks like if I want to stay FIRED are switching to SEPP for withdrawals.  Do you think petitioning the financial aid officer to remove the Roth conversion from income and refigure federal financial aid would work if our only remaining "income" is the untaxed Roth distributions?

The 4a/4b stuff makes sense.  I just didn't want to go looking at Form 8606 to trace where those show up.  Thanks for confirming.

I'm pretty sure FAFSA still uses "prior prior" tax returns.  So if you have a freshman now (who's just finishing freshman year), then they'd start sophomore in 25, junior in 26, senior in 27, and college in 28.  FAFSA now opens in October of their senior year, so if that timeline is right you could complete the FAFSA on 10/1/2027 using your 2026 federal income tax return (aka "prior prior" year to 2028).

To the question in your last paragraph:  Yes, I do.  The GEN-99-10 letter is obscure and old, but it worked like a charm every time when I used it, and that was with two different kids at two different schools over multiple academic years.  You submit the original FAFSA with the information from your tax return which includes the Roth conversions.  You then contact the school's FA office and say you did Roth conversions.  They'll ask for some proof.  You provide the proof.  They refigure your aid as though the Roth conversion didn't happen.  Done.

Specifically, I don't think they care in the slightest what the rest of your tax return looks like - they just subtract out the Roth conversions and refigure aid.  In my daughter's case, I think they had a computer program to refigure it because it took literally five seconds for the FA at her school to refigure the aid.

They also probably don't care in the slightest whether it looks like you can support yourself on your income level, how many other kids you have, etc.  (Unless those are relevant to other reasons to appeal the aid calculation.)

[Arbitrage]

It appears that for the income you're wondering about, it ends up including in untaxed income the amount on Line 4a minus the amount on Line 4b of your 1040.  I'm not sure, but I think a Roth distribution of contributions would show up in that way.

That's where they showed up when I withdrew Roth IRA contributions, and did a Roth conversion in the same year.  Turbotax added all the distributions into 4a, and 4b had only the taxable portion.

Since I have a High School Freshman, it looks like next year will be my first FAFSA year.  Then it's almost every year for the next 15 because of the age of our kids. 

This is my 4th year FIRED, and we've been doing Roth conversions for two reasons: 1) So that we can vary the withdrawal amount year to year and 2) because low rates and low age meant the withdrawal rate using SEPP wasn't attractive.

It looks like if I want to stay FIRED are switching to SEPP for withdrawals.  Do you think petitioning the financial aid officer to remove the Roth conversion from income and refigure federal financial aid would work if our only remaining "income" is the untaxed Roth distributions?

I'm planning to do SEPP to avoid FAFSA complications.  Auto-zero SAI is likely going to be a big deal for us, with a sizeable taxable investment account. 

Not sure what you consider to be low rates on the SEPP, but they changed the rules a few years back, so that you can always use at least 5% in your calculations.  If you're 4 years FIRED you may have been researching this before that change was made (2022 I believe). 

[CrustyBadger]

Just FYI, it probably doesn't apply to you but just in case,  to not consider assets for Pell grant, I believe you also need to not file any of the following schedules:

The applicant’s parents’ 2022 combined AGI is less than $60,000 and they do not file a Schedule A, B, D, E, F, or H, AND

They do not file a Schedule C, OR

They file a Schedule C with net business income of not more than a $10,000 loss or gain.

https://fsapartners.ed.gov/knowledge-center/fsa-handbook/2024-2025/application-and-verification-guide/ch3-student-aid-index-sai-and-pell-grant-eligibility

[secondcor521]

It appears that for the income you're wondering about, it ends up including in untaxed income the amount on Line 4a minus the amount on Line 4b of your 1040.  I'm not sure, but I think a Roth distribution of contributions would show up in that way.

That's where they showed up when I withdrew Roth IRA contributions, and did a Roth conversion in the same year.  Turbotax added all the distributions into 4a, and 4b had only the taxable portion.

Since I have a High School Freshman, it looks like next year will be my first FAFSA year.  Then it's almost every year for the next 15 because of the age of our kids. 

This is my 4th year FIRED, and we've been doing Roth conversions for two reasons: 1) So that we can vary the withdrawal amount year to year and 2) because low rates and low age meant the withdrawal rate using SEPP wasn't attractive.

It looks like if I want to stay FIRED are switching to SEPP for withdrawals.  Do you think petitioning the financial aid officer to remove the Roth conversion from income and refigure federal financial aid would work if our only remaining "income" is the untaxed Roth distributions?

I'm planning to do SEPP to avoid FAFSA complications.  Auto-zero SAI is likely going to be a big deal for us, with a sizeable taxable investment account. 

Not sure what you consider to be low rates on the SEPP, but they changed the rules a few years back, so that you can always use at least 5% in your calculations.  If you're 4 years FIRED you may have been researching this before that change was made (2022 I believe).

You can use up to 5% even if the AFR is lower.  I think you knew that, but the way you worded it could be misinterpreted.

[secondcor521]

Just FYI, it probably doesn't apply to you but just in case,  to not consider assets for Pell grant, I believe you also need to not file any of the following schedules:

The applicant’s parents’ 2022 combined AGI is less than $60,000 and they do not file a Schedule A, B, D, E, F, or H, AND

They do not file a Schedule C, OR

They file a Schedule C with net business income of not more than a $10,000 loss or gain.

https://fsapartners.ed.gov/knowledge-center/fsa-handbook/2024-2025/application-and-verification-guide/ch3-student-aid-index-sai-and-pell-grant-eligibility

There are now multiple paths to maximum Pell.

One is the one you quoted.

A new one is if the family AGI is less than either 175% or 225% of FPL (depending on the parent's filing status).

I think there may be another one, but I haven't studied this area of the law lately.

[Arbitrage]

Just FYI, it probably doesn't apply to you but just in case,  to not consider assets for Pell grant, I believe you also need to not file any of the following schedules:

The applicant’s parents’ 2022 combined AGI is less than $60,000 and they do not file a Schedule A, B, D, E, F, or H, AND

They do not file a Schedule C, OR

They file a Schedule C with net business income of not more than a $10,000 loss or gain.

https://fsapartners.ed.gov/knowledge-center/fsa-handbook/2024-2025/application-and-verification-guide/ch3-student-aid-index-sai-and-pell-grant-eligibility

There are now multiple paths to maximum Pell.

One is the one you quoted.

A new one is if the family AGI is less than either 175% or 225% of FPL (depending on the parent's filing status).

I think there may be another one, but I haven't studied this area of the law lately.

In an above section:

A student is eligible for a Maximum Pell Grant if any of the following is true:

Dependent Student

The student’s parent(s) is not required to file a federal income tax return; or

The student’s parent is a single parent and has an AGI greater than zero and less than or equal to 225% of the poverty guideline for the applicant’s family size and state of residence; or

The student’s parent is not a single parent and has an AGI greater than zero and less than or equal to 175% of the poverty guideline for the applicant’s family size and state of residence.

Independent Student

The student (and spouse, if applicable) is not required to file a federal income tax return; or

The student is a single parent and has an AGI greater than zero and less than or equal to 225% of the poverty guideline for the applicant’s family size and state of residence; or

The student is not a single parent and has an AGI greater than zero and less than or equal to 175% of the poverty guideline for the applicant’s family size and state of residence.

SAI for Maximum Pell Grant Recipients

A dependent student whose parents are not required to file a federal income tax return OR an independent student (and spouse, if applicable) who is not required to file a federal income tax return for the prior-prior tax year is assigned an SAI equal to -1500. Other students eligible for a Maximum Pell Grant will be assigned an SAI equal to 0 or a calculated SAI, whichever is less.


Qualify that way and you don't ever get to any asset tests or Schedule filings.