A little background… Tried to retire from teaching after 37 years in the classroom last spring. District wasn’t able to find a replacement, so I agreed to return 1/2 time one more year. Will fully retire at the beginning of June. My son is a graduating senior in high school with a 4.0 GPA and is moving on to college next fall.
In preparing for retirement, I moved the bulk of my 403b retirement account into a traditional IRA, and moved $45,000 into a Roth IRA (paid the taxes on it). I did this in 2023. Unfortunately, I did not anticipate the effect this conversion would have on my son’s financial aid offer. The Roth rollover upped my AGI for 2023 by $45,000. And what tax return do they look at to determine financial aid for 2025? The 2023 return.
I tried to appeal based on “special circumstances”, explaining that this was just a one time retirement move in which I simply moved money from one retirement account into another, but if it shows as “taxable income” on your tax returns, they have to count it apparently. I wish I would have known more about this when I started prepping for retirement. I spent my whole career teaching in a small, rural, public school, so never a high income earner, but they are calculating financial aid as if I earned well over $100,000 in 2023. I also have an “inflated income” in 2024 relative to my actual teaching career (began collecting pension + working 1/2 time + a smaller $12,000 Roth conversion).
I have a meeting scheduled with my financial advisor next month to strategize on the best way to balance our retirement goals in a way that doesn’t penalize our kids college pathway.
My reply to your post is based on observing the college financial aid landscape for many years and being a past recruiter for one of the big three military academies (and putting two children through college). As far as your “way that doesn’t penalize our kids college pathway” …I need to tell you about the realities of college “aid.” Don’t fret about your temporary income bump. It won’t matter. The only AID that is received from even US average income families ($55k-59K) is in the form of LOANS. Your children will not be “penalized.” Regardless of the nice 4.0, the only FREE aid in the form of grants is awarded to perfect SAT/ACT scores (national merit scholars) and good students coming from poverty (need based). There is no in between except for various and sundry Rotary Club, Car Dealer, and Credit Union $500 “scholarships.” Clark Howard receives a ton of calls from people wanting to essentially HIDE money and still get free “aid.” This drives me nuts. I realize this is not your situation but I digress…
If you’re hoping for a no-debt degree it is still do-able especially with two years of community college followed by a transfer to finish at State U. There is no shame in CC!
Take care, good luck and thanks for mentoring our youth in STEM.
I had a daughter who went through a BS Electrical Engineering curriculum at the University of Houston. We were at the time (and still are) high income. Yet, she got $7,000 a year in pure merit-based awards. I don’t think her SAT/ACT was perfect but it was high. Her GPA was 4.0 and she had a number of AP courses in high school, notably BC level Calculus which she scored well on.
If she had lived at home, my annual out of pocket would have been about $15,000. Of course it’s higher now with inflation. But she was hired right out of school, and I drove her to her new city one month after graduation. But the traffic would have been terrible for her, and her social life would have suffered.
Thank you so much for your reply, and bringing your experience to the discussion. I guess the reason I was disappointed is that when filling out the FAFSA I realized how this conversion made my AGI jump, so I ran the 2022 AGI (year before the Roth conversion) through a student aid estimator at student aid.gov and with a $70,000 AGI, it showed some Pell Grant money. The college we’re looking at has a “Pell Pathway” program that offers free tuition for students who qualify for Pell grants if I’m understanding correctly. Problem is, you have to enter the “pathway” your freshman year to qualify. Once you’re accepted into this special program, you remain regardless of your AGI in future years. It just felt like my timing couldn’t have been worse for that Roth conversion.
Thanks for your many years of service as an educator! Did you have a specific reason to move your 403b to an IRA? Was it with a high-cost provider and now you’re with a low-cost company?
Personally, I’m not a big fan of Roth conversions as it artificially increases your income (as you found out) and forces you to pay income tax now instead of deferring it to the future. If you’re currently working, you’re probably in a higher present tax bracket compared to when you’re in your late 60s or 70s and not working. At that time you’ll have a lower (or zero) income from employment and therefore a low bracket. That’s when it makes sense to pay income tax out of your 403b or IRA withdrawals. Of course, it’s more complicated considering Medicare and other factors.
In any case, different colleges offer different aid. Sometimes it’s a simple discount off list price. Or it’s a grant for academics, athletics, musical talent, leadership, etc. I’d encourage your son to avoid high-price colleges if possible and try to find a suitable program at a community college or state/regional location. Although in general private colleges are more expensive than state-supported, that’s not always true. My niece and nephew went to a small private liberal arts college with a very high list price but after all sorts of deductions they ended up paying about half (50% discount). They still had loans but had a positive experience.
Also consider room and board, fees, cost to travel back and forth from home, dorms vs. fraternities vs. off-campus, etc. Expenses like buying T-shirts for every event and pizza/burgers instead of dorm food can really add up. Hopefully he’s willing to work a part-time job while studying for his own incidentals. And to really save money he could try working a full-time job and taking classes part-time instead of vice versa. Good luck!