Fafsa Inherited Ira: Navigating Inherited Assets and College Costs

Navigating the world of FAFSA and inherited IRAs can be overwhelming, especially if you're dealing with a recently inherited asset. The good news is that you can use your inherited IRA to help pay for college costs.

If you're the beneficiary of an inherited IRA, you can use the funds in the account to pay for qualified education expenses, including tuition, fees, room, and board. This can be a huge relief, especially if you're struggling to make ends meet.

You can also use the 529 plan to save for college costs, and the funds in the plan can be used to pay for qualified education expenses. The 529 plan has a high contribution limit, which can help you save for college costs over time.

In order to qualify for FAFSA, you'll need to report the inherited IRA on the FAFSA form, even if you're not using the funds for college. This may affect your Expected Family Contribution (EFC), which can impact your eligibility for financial aid.

Inherited IRAs can be a complex topic, especially when it comes to college finances. A minor child who inherits a retirement account from someone other than their parents is subject to the 10-year rule.

This means they must deplete the account within 10 years, which can be challenging, especially if they're in college. The child may or may not be required to take RMDs each year, depending on the decedent's age when they passed away.

If the decedent had already reached their Required Beginning Date for RMDs, the minor child would be required to continue taking annual RMDs from the inherited IRA in addition to the 10-year rule. This can lead to a loss of college financial aid due to the taxable income assigned to the child.

Parents can set up a Roth IRA for their children if they have earned income, which can help them avoid these complexities.

Inheritance and Financial Aid can be a complex and nuanced topic. A substantial increase in a college student's income may indicate to the government that they are no longer in need of financial assistance.

Depending on the type of asset inherited, it may be exempt from reporting on the FAFSA form as an asset. For example, an inherited IRA is exempt, but if you take money out of it, that money must be reported.

A smaller inheritance may not have too much of an impact on the formula, but it's still essential to consider decisions that could affect eligibility for scholarships or other opportunities. Only 47% of parental income and 5.6% of parental financial assets are assessed as part of college financial aid eligibility.

If you take an inheritance in one big check, you have to report the money as income, which potentially lowers your financial aid eligibility even further. In contrast, if you leave the money in the IRA and withdraw it over a period of years, timed accordingly to the student's college years, you can minimize or maybe even avoid this negative impact.

Both traditional and Roth IRA and 401K withdrawals still show up as income on your taxes, and a big increase in your income could significantly lower your financial aid eligibility. You could qualify for much less financial aid or get none at all based on the timing of your withdrawals and when a student is in college.

A sizable portion of the inherited money could still be left over after college if it's kept in the right account and not withdrawn right away. The threshold for exempt assets often hovers around $50,000 for eligible families.

If a minor child inherits a retirement account from someone other than their parents, they're no longer allowed to take RMDs from the inherited IRA until age 21, and then switch to the 10-year rule.

The child is immediately subject to the 10-year rule, which means they must deplete the account within 10 years. This requires detailed tax planning to avoid adverse consequences, such as losing college financial aid eligibility due to taxable income associated with those distributions.

A minor child inheriting a retirement account from a non-parent is treated the same as any other non-spouse beneficiary. They may or may not be required to take RMDs each year, in addition to depleting the account within 10 years, depending on the age of the decedent when they passed.

If the decedent had already reached their Required Beginning Date for RMDs, the minor child would be required to continue taking annual RMDs from the inherited IRA, in addition to the 10-year rule. This can lead to complex tax planning and potential financial aid implications.

Parents can set up a Roth IRA for their children, as long as they have earned income. This can be a great way to provide for their child's future, but it's essential to understand the tax implications and how it may affect their college financial aid eligibility.

Inheriting a large sum of money can significantly impact college financial aid eligibility. A $100,000 inheritance, for example, could reduce a student's financial aid eligibility to zero if not managed properly.

You'll want to carefully consider how your assets will impact your eligibility for student aid when filling out the FAFSA.

Your husband's inherited IRA is a non-reportable asset for FAFSA purposes.

However, if he takes withdrawals from the IRA, the income from those withdrawals will need to be reported on the FAFSA.

Retirement plans such as 401(k) plans, 403(b) plans, pensions, traditional IRAs, Roth IRAs, and others are also not reported on the FAFSA.

But remember, if your husband is a non-spouse beneficiary on his mom's IRA, he'll need to take Required Minimum Distributions (RMDs) from this inherited IRA annually.