I‘d like to convert a traditional individual retirement account to a Roth IRA, but my son will be going to college soon. Will converting the IRA affect our chances of getting financial aid?
It might. Even though IRA balances aren’t counted as assets in the federal financial aid formula, converting a traditional IRA to a Roth could affect your financial aid award because the money you convert will increase your taxable income for the year.
If you plan to apply for financial aid in the next few years, you may want to time your Roth conversion carefully, IRA expert Ed Slott warns. If your child is a high school senior, this year’s financial aid application is unaffected because it reflects your 2009 income. But when you file for financial aid next year, a conversion could have an effect. Even if your child is a sophomore or a junior, a conversion in 2010 could affect your college aid award if you take advantage of the opportunity to spread the tax bill for the conversion over 2011 and 2012.
If you decide to make the conversion anyway, contact the financial aid administrators at the colleges to which your child is applying and explain that your income looks unusually high because you converted a traditional IRA to a Roth. Although there isn’t a space on the Free Application for Federal Student Aid to note the Roth conversion, aid administrators are allowed to use their professional judgment to decide whether to count the conversion in your income, says Haley Chitty, spokesman for the National Association of Student Financial Aid Administrators. “It’s important for families to make sure that the financial aid office is aware of it,” he says. “Different schools will handle it differently.”
Chitty recommends contacting the colleges to explain your situation as soon as your FAFSA has been processed and you’ve received your federal student aid report, rather than waiting until you get your aid award from the college. “Some may be able to adjust your award upfront, and some may wait until you get your aid award to make any changes,” he says.
If you’ve already converted a traditional IRA to a Roth but want to avoid the financial aid issue, you have until Oct. 15, 2011, to undo a Roth conversion that was made in 2010.
Send your questions and comments to [email protected].
