When did you learn the rules of this game? You probably
learned to play when you were a kid. What happened when you first played
against another kid? You probably lost because you didn’t know the strategies.
In order to win at any game, you first have to know the
rules, and then you can use strategies.
Now think about college financial aid. So many people I
speak with tell me the same thing – “it’s such a game.” in their most
derisive voice.
Last week, a woman in my community ed class asked a question
regarding financial aid. She had filled out the FAFSA form for her son’s
schools, and wondered exactly what should and should not have been included on
the form.
Even though the answer was in the form instructions – but
who really reads the instructions? – she had included her retirement
accounts. After all, the question asked for the amount of total
assets. And it’s a common mistake.
By including her retirement assets, she hurt her son’s
chances for need-based financial aid. Every dollar extra she included but didn’t
have to cost her just under 6 cents of aid. That is, including her $100k in retirement
assets means $5,640 less in aid.
To pay for the college bill, her intention is to withdraw $20k
from some old 401k accounts. She knew there would be taxes due but asked if
that is the best way to pay to get money.
Again, knowing the rules matter. I told her that by simply
rolling the old 401k into an IRA and then withdrawing the money, she would save
the 10% early withdrawal penalty. The penalty exception applies to IRAs, not to
401k accounts.
Let’s recap. By including retirement assets, she cost
herself almost $6000. And then withdrawing from a 401k was going to cost her
another $2000 in penalties. In all, not knowing the rules was going to cost her
$8000 needlessly.
