The Free Utility for Federal Scholar Support (FAFSA) determines your eligibility for need-based monetary assist for school. In earlier years, the FAFSA requested households in regards to the quantity they contributed to employer-sponsored retirement accounts like 401(ok)s annually, and factored it into households’ total yearly earnings, decreasing their eligibility for need-based assist.

That’s altering: Below a brand new rule for the FAFSA kind, pre-tax contributions to office retirement plans will now not rely as earnings, which suggests the potential for larger monetary assist. Right here’s how households can use this modification to prioritize each their retirement financial savings and budgeting for school prices.

How the brand new FAFSA rule will influence your retirement planning

In earlier years, the FAFSA requested households to report their retirement contributions, which might issue into their complete earnings. That meant these {dollars} would cut back their possibilities for need-based assist. That’s all set to vary with a redesigned FAFSA, by which questions on untaxed funds to tax-deferred pension and retirement-savings plans have been eliminated. These modifications are a part of the FAFSA Simplification Act handed again in 2020.

This variation signifies that with correct planning, a 401(ok) can now present each retirement safety and assist enhance your eligibility for monetary assist, since saving pre-tax via your employer might be a viable technique to scale back your complete earnings as reported on the FAFSA. In different phrases, it’s possible you’ll now not be confronted with the strict “both/or” choice to spend money on your baby’s school or your retirement plan. Whereas some faculties and universities use options to FAFSA, this modification will open up extra choices for a lot of households hoping to strategically leverage their retirement financial savings.

A technique the FAFSA course of might be simplified is by drawing extra data immediately from tax paperwork. Nevertheless, the FAFSA collects that tax data from two years previous to the applying, so contributing extra to retirement accounts this 12 months received’t have an effect on the monetary assist awarded for 2024-25 college 12 months—however it can for the 2025-26 12 months.

The redesigned FAFSA is anticipated to launch in December 2023 for the 2024-25 tutorial 12 months. Right here’s how one can begin prepping now to use for federal scholar assist in December.