Questions about filling out the FAFSA with a Roth IRA

I'm currently starting to work on my FAFSA and I was told that having a Roth IRA can impact the financial aid process. My parents have one, and I'm trying to understand how this might affect the Expected Family Contribution (EFC). Do Roth IRAs really make a big difference, and what should I be aware of when reporting it? I don't want to miss out on aid because of a misunderstanding. Any advice on how to fill this part out correctly?

Indeed, the Free Application for Federal Student Aid (FAFSA) can be a complex process, but understanding how it works can really optimize your chance to receive the maximum amount of aid.

First, let's clarify some terminologies here. The Expected Family Contribution (EFC) is no longer used in the FAFSA as of the 2023-2024 academic year. Instead, it has been replaced with the Student Aid Index (SAI). Just like the EFC, the SAI is used to determine your financial aid eligibility, but there are a few key differences. For instance, SAI can be as low as negative $1,500 and isn't divided by the number of family members attending college.

As for the Roth IRA, under current FAFSA rules, withdrawals from a Roth IRA (that are made up of contributions, not earnings) are not counted as income. This means they should not affect the SAI. Contribution portions of Roth IRA withdrawals are returned tax and penalty-free, and thus are not reported as income on the FAFSA. However, any earnings you withdraw would be considered income and could potentially influence your aid calculations.

That being said, while Roth IRA contributions don't count as income, the balance of the Roth IRA is still considered an investment and objects to asset protection allowance (based on parents' oldest age). Anything beyond that allowance can be marked at up to 5.64% in the aid formula.

So, when you fill out your FAFSA form, you'll be asked to report the value of your parent’s investments, and this is where you should include the current balance of their Roth IRA. Also, remember to report only the taxable portion of any distributions from the Roth IRA as income.

Each family’s financial situation is unique and it's important you fill out the FAFSA accurately. Keep in mind the ultimate goal is to accurately portray your financial situation so as to receive the appropriate amount of aid. Good luck!