Knowing what to include on your FAFSAⓇ application can be tricky. If you have questions about how to handle your retirement plan distributions on your application, you’ve come to the right place.
You will never have to report the value of qualifying retirement plans on the FAFSA application. What you will have to report is any voluntary contributions to or distributions from those plans that took place in the tax year prior to your FAFSA application.
Roth IRA Distribution Requirements
A distribution (or withdrawal) from a Roth IRA is tax-free and penalty-free provided that certain qualifications are met. This might include using the money to purchase a first home or for non-reimbursable medical expenses.
If you are thinking about using your Roth IRA for education expenses, though, think again. Education costs are not qualifying expenses and therefore, if withdrawn before the age of 59½, will result in taxes and penalty fees for taking the money out early.
Roth IRA Distributions on the FAFSA
Reporting an IRA distribution on the FAFSA application is different depending on how and when the money was withdrawn.
If you meet the requirements for untaxed distribution (i.e., over 59½ and had this IRA for over five years, under 55 and use the funds for a qualifying purpose), any withdrawal or distribution from a Roth IRA account made in the tax year prior to completing a FAFSA application must be reported on the FAFSA application as untaxed income. You will provide this value in section #94.
If you did not meet those untaxed distribution requirements and paid taxes on the withdrawal of your funds, you will need to report this as part of your adjusted gross income (AGI). You will provide this number on question #85.
Converting from one retirement plan to another does not apply and should not be included on your FAFSA application. Note that if you use the IRS Data Retrieval Tool to complete your application, it will erroneously count your rollover as untaxed income and cannot be changed manually on the application. If this is the case for you, contact your financial aid office immediately.
Effect of Roth IRA Distributions on the FAFSA
The sum of your taxable and nontaxable income combines to help generate your Expected Family Contribution (EFC), used to determine the amount of aid you will receive. Since your retirement plan distributions count as either taxable or nontaxable income, you will significantly increase your EFC (meaning you will be expected to contribute more money) and reduce your need-based financial aid eligibility.
There is no way around this required documentation of your IRA distributions. If possible, your best bet is to wait until you will no longer need to request federal aid before withdrawing funds from your IRA.
For more information, read our article on the impact of retirement plans on the FAFSA.