By Vincent Barbera, CFP®, MSFS
Over 13 million students depend on financial aid to cover college costs. (1) When one of these students receives an inheritance from a loved one, they may get excited thinking about how they can use the money to cover day-to-day expenses like rent and groceries. But an inheritance can greatly reduce a student’s financial aid depending on the type of gift they receive.
Below we discuss which types of assets you must report on FAFSA and strategies you can use to minimize the negative impacts of an inheritance.
FAFSA: What Assets Do You Have To Report?
Some assets have to be reported on the FAFSA, while others don’t. If you file FAFSA as a dependent, you’ll include any assets in your name and your legal guardian’s name. If you file as an independent, you’ll list any assets in your name and your spouse’s name if you’re married.
Some examples of reportable assets include: (2)
- Cash (checking and savings accounts)
- Investment accounts (brokerage accounts, stocks, bonds, mutual funds, precious metals, private equity, CDs, and more)
- Real estate (rental properties, real estate investment trusts (REITs), installment contracts, and more)
- College savings plans (Coverdell savings accounts, 529 plans, and prepaid tuition plans)
- Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts
Some examples of non-reportable assets are:
- Retirement plans (including 401(k)s, 403(b)s, traditional and Roth IRAs, SEP and SIMPLE plans, pension plans, annuities)
- Life insurance policies (including term and whole policies)
- Personal items (like a coin, stamp, or art collection, clothing, cars, boats, furniture, and so on)
Note: You don’t have to report assets if they’re in a relative’s name who isn’t your legal guardian.
So, if your grandparents created a 529 college savings plan for you and it’s in their name, you’re not required to report it on your FAFSA. But you will report any distributions or withdrawals as income.
Strategies For Minimizing The Negative Impact Of An Inheritance
If you’ve received a reportable asset as an inheritance, here are three strategies you can use to increase your chances of receiving financial aid.
Pay Off Debt
Paying off debt has several advantages. The biggest benefit is that it reduces the size of your inheritance, which decreases the amount of assets you have to claim on FAFSA. Plus, paying down debt saves you a ton of money in the long run. For example, if you have a credit card with a $5,000 balance and a 15% APY, you could save $750 a year by paying it off.
Max Out Retirement Contributions
Retirement accounts aren’t considered reportable assets, so you could increase your eligibility by maxing out these accounts. The maximum contribution limit for 401(k)s in 2020 is $19,500 or $27,000 if you’re at least 50 years old. (3) For Roth IRAs, the limit is $6,000 or $7,000 if you’re at least 50. (4)
Transfer The Gift To Someone Else
You could transfer your inheritance to a grandparent, sibling, or other relative. By doing so, you wouldn’t have to report it on FAFSA. But you should only do this if it makes sense for your unique situation.
How We Help
Receiving an inheritance from a loved one has many benefits, but it also comes with complications—especially if you or your child is heading off to college. At Newbridge Wealth Management, we’re dedicated to helping our clients leave and receive inheritances in the most efficient manner possible.
Whether you need help managing a new windfall or creating an estate plan for future generations, we’re here to guide you every step of the way. Click here to access our online calendar and easily schedule a free 15-minute introductory phone call. Or you can email us at email@example.com or call 610.727.3960 to schedule a meeting today!
Vincent R. Barbera, CFP®, MSFS is a managing partner and co-founder of Newbridge Wealth Management, a private financial counseling firm located in Berwyn, Pennsylvania. Believing in a patient, disciplined approach to investment management that delivers value and peace of mind, he utilizes a process-driven approach to financial planning that provides comfort and clarity to his clients’ long-term goals. Along with a bachelor’s degree in psychology and business, he has a master’s degree in business and financial planning and Certified Financial Planner™ designation. Learn more by connecting with Vincent on LinkedIn, or send him questions at firstname.lastname@example.org.