Question for the Money Doctors
Question submitted on Jan 24, 2020.
QuestionMy husband's and my youngest child will be going to college in 5 1/2 years. We will be at retirement age at that time. Would it benefit us to retire a year before he enters college in terms of getting additional financial aid, or is there any effect on when we retire vs when he enters college?
Financial aid award packages are based on the Expected Family Contribution (EFC). This amount is calculated with the EFC formula, which uses the information students provide on the Free Application for Federal Student Aid (FAFSA) form. The amount calculated is then subtracted from the student’s cost of attendance to determine their need for various federal student financial assistance. The four primary factors that go into the EFC are income, assets, household size, and number of children in college at the same time.
Regarding income, it may be beneficial to retire the year before your child goes to school if your income will be drastically lower after retirement. There are various allowances against income – the state and other tax allowance, the Social Security tax allowance, the income protection allowance, and the employer expense allowance. The state and other tax allowance is based on total income, so if the income is lower, the allowance will also be lower. However, once again, the benefit of retirement varies based on the differences in income pre-retirement and post-retirement. The Social Security tax allowance is based on income earned from work, so if retired, your allowance will be lower. The income protection allowance is based on household size and number of college students in the household, so this amount will be the same regardless of whether you decide to retire, assuming no other college students in your household at that time. The employment expense allowance is not available for those who are retired.
Regarding assets, reportable assets include cash savings, 529 plans, and any investments not in your retirement accounts, so this number should be similar regardless of if you have retired or not. There is only one allowance – the education savings and asset protection allowance. This amount is based on your age, so there is not a difference if you retire or not. However, in recent years, the allowance amount dropped significantly and may no longer be available when your son enters college in five-six years.
Ultimately, the financial benefit of retiring the year before your children go to college varies based on your current income compared to your prospective post-retirement income. Some allowances may be lower if retired, but your income may also be lower, providing you with an overall lower EFC and therefore more financial aid. You should discuss with an advisor that specializes in education planning, such as a CPA/PFS. Your unique
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