Talk to financial aid officersThe good news: College financial aid officers can discount the temporary income spike caused by the IRA conversion. But be sure to ask.
In 1999, the Department of Education sent a letter urging financial aid personnel to use their professional judgment and review individual cases involving transfer of funds from a traditional IRA to a Roth, Kantrowitz says.
"Schools have the authority to eliminate the impact of a Roth IRA conversion from the need analysis formula," he says. "They're not required to do so. But my experience is, most colleges, if asked, will do so."
Ed Irish, director of financial aid at the College of William & Mary in Virginia, says the state-supported school would make the adjustment. "But I suspect that the people doing the conversion probably have a fairly high income and won't qualify for aid anyway," Irish says.
That may be true at many public schools, although it never hurts to fill out the FAFSA, Kantrowitz says. But at private colleges, where tuition, room and board can total $50,000 and more per year, even families who earn six figures may qualify for some form of aid or loans.
"Private four-year colleges have more institutional aid because their costs are higher," says Alison Rabil, director of financial aid at Duke University in North Carolina. "We want to maximize institutional aid and federal aid. We can use that professional judgment on both forms."
Duke University, a private school, takes a proactive approach, Rabil says. "If we see a withdrawal from an IRA, we will generally ask the family, 'What did you do?'" she says. "It's a cue for us that something is going on with this family that they need to take drastic action to get their hands on a large amount of cash. My staff knows to call and find out what's going on. We can usually remove that taxable piece of their income. How many families earning $150,000 can plunk down $55,000 for college?"
Although some schools will be proactive, you should still check, Kantrowitz says. Don't discount the IRA conversion yourself on the FAFSA because schools can compare the FAFSA to your federal tax return. "Your FAFSA could be selected for verification -- at least 30 percent are," Kantrowitz says.
Still worried? Call the financial aid offices of the universities your child is interested in and ask about the policy.
"You need to be your own advocate," Rabil says. "If you understand how the system works, you're better able to use it to your advantage."
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