ic S/general/checkmark circled Thanks for subscribing! Be on the lookout for our next newsletter.
ic S/general/checkmark circled Saved to Favorites.
Articles / Applying to College / Financial Aid and Retirement Accounts

Nov. 13, 2002

Financial Aid and Retirement Accounts

Question: My husband and I are 54 and 53 respectively and want to increase our contributions to our TSP 401(K) plan and Roth IRAs. Our daughter, who is applying for September 2003 college admission, is also applying for financial aid. Is it wise to increase contributions to our retirement accounts this year? What are the pros and cons of doing this?

This response to your very good question begins with a giant disclaimer. It is difficult to give accurate, specific financial suggestions without knowing a lot more about your family’s situation and the colleges on your daughter’s list. Only a bona fide financial advisor who is privy to your personal information can give you advice that will help you make the best decisions. Moreover, college financial aid methodologies do vary from institution to institution. In other words, this free advice comes with a you’re-getting-what-you’re-paying-for caveat!


Now, having said all that, here are some thoughts: the down side of putting money into your 401K (we’ll get to the Roth in a minute) is that whatever money you are deferring goes into the financial aid formula as “untaxed income.” This could mean that your daughter will receive less aid than if the same amount was counted as taxed income. (One way or another, it still counts as your income. It’s not being “hidden” from the financial aid guys.) The other drawback to putting money into the 401K is that you will have less cash available to handle your expected family contribution to college costs.

On the plus side however, is that if you are at your peak incomes right now (maybe likely given your age group?), then you will be getting the top tax savings on retirement deferrals.

College financial aid officers rarely sympathize with parents who object to counting retirement deferrals as “income.” The good news, however is that most colleges do not count the accumulated retirement assets already in place in any financial need formulaâ€"just the income you’re putting in there now.

The main thing to understand is that money you are deferring in the years you are applying for aid is not hidden from the financial aid formula. In fact, it is counted heavily since it is not offset by taxes.

Roth IRAs are different because they are for education. Those amounts in a given year are not usually counted as income but as an asset. That is an advantage because assets don't go to the bottom line the way income does. So the Roth deferrals will not reduce your eligibility for need-based aid (or the amount you will probably receive) as much as the 401K deferrals. Additionally, the Roth monies can be used to pay for education without incurring withdrawal penalties, as is the case with the 401K.

Again, your best bet is to talk to a financial advisor, but hopefully this will give you some sense of how this confounding process works.

Written by

Sally Rubenstone

Sally Rubenstone

Sally Rubenstone knows the competitive and often convoluted college admission process inside out: From the first time the topic of college comes up at the dinner table until the last duffel bag is unloaded on a dorm room floor. She is the co-author of Panicked Parents' Guide to College Admissions; The Transfer Student's Guide to Changing Colleges and The International Student's Guide to Going to College in America. Sally has appeared on NBC's Today program and has been quoted in countless publications, including The New York Times, The Washington Post, USA Weekend, USA Today, U.S. News & World Report, Newsweek, People and Seventeen. Sally has viewed the admissions world from many angles: As a Smith College admission counselor for 15 years, an independent college counselor serving students from a wide range of backgrounds and the author of College Confidential's "Ask the Dean" column. She also taught language arts, social studies, study skills and test preparation in 10 schools, including American international schools in London, Paris, Geneva, Athens and Tel Aviv. As senior advisor to College Confidential since 2002, Sally has helped hundreds of students and parents navigate the college admissions maze. In 2008, she co-founded College Karma, a private college consulting firm, with her College Confidential colleague Dave Berry, and she continues to serve as a College Confidential advisor. Sally and her husband, Chris Petrides, became first-time parents in 1997 at the ripe-old age of 45. So Sally was nearly an official senior citizen when her son Jack began the college selection process, and when she was finally able to practice what she had preached for more than three decades.

More on Applying to College

Can I Reapply After Early Decision or Early Action Rejection?
Applying to College

Can I Reapply After Early Decision or Early Action Rejection?

Question: If I apply to a college through Early Decision or Early Action, but I am not accepted, can I apply again through Regula…

38547127311_5463cc8dd3_w.jpg
Applying to College

How To Get Into Penn in 2022

There's no doubt that the University of Pennsylvania is extremely difficult to get into. In 2021, the ivy league school in P…

Early Decision or Early Action?
Applying to College

Early Decision or Early Action?

Question: Why should I consider an Early Decision or Early Action college application? What's the difference?

Your level of d…

Can I Apply Early Twice?
Applying to College

Can I Apply Early Twice?

Question: I am planning on applying early decision to my first-choice college. I will be notified of my status by December 31st. …

Advantages of EARLY Early-Decision Application?
Applying to College

Advantages of EARLY Early-Decision Application?

Question: I'm applying Early Decision to an Ivy League school. Is there any advantage for me to send in the application mate…

A-Z College Forums

Browse the College Forums
C1E9D4E7-C4C9-4B28-8946-8F441A6D62B3

Find Your Best Fit

Find your best fit college and track your favorite colleges.