FAFSA Deferred Compensation
Untaxed 401K Retirement Plans...

FAFSA deferred compensation can be understood with one simple rule: Just because the IRS cuts you a break, that doesn't mean Federal Student Aid will. Income is income.

On question 95 (or section 5 of the online 2010-2011 FAFSA application) you will report all untaxed income.

Your Roth IRA account income should not be included-

because its already been taxed and counted in your adjusted gross income (AGI).

Your pre-tax contributions to 401K retirement plans and 403B plans should be reported here.

And, any other pre-tax contributions to tax-sheltered or deferred pension, savings or annuities would also be recorded here.

(This includes SEP, SIMPLE, or KEOGH plans.)

• Employer contributions or employer matching amounts should not be reported.
• A direct 401K rollover should not be recorded (nor should any type of direct rollover of a retirement or pension plan).
• The total value of your plan should not be reported, just the contributions and/or deductions for the year.

• And, the figures you need to report are not limited to just the ones that appear on your W-2.

If you contribute money to a retirement plan that is not considered a "qualified retirement plan" it should be reported as an investment on questions #91 or #92- depending on what type.

(The FAFSA online application shows how those questions correspond to the printable FAFSA application by putting the numbers in parentheses.)

When you renew FAFSA (on the FAFSA website) you may be given the option of having your tax information imported directly from the IRS. If you do this, the appropriate spots should be filled in for you. You will need your FAFSA PIN from the previous year.

Non-Retirement FAFSA Deferred Compensation

• royalty agreements when a business is sold
• owner financing agreements
• forward sales of shares of stock
• deferred wages

There are acceptable strategies for working out what value should be assigned to this compensation. If your situation is one of these, you should consult a tax/finance expert for more information [COMPENSATED AFFILIATE LINK:

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Check your FAFSA deadline to give yourself plenty of time to understand how to report your finances.

Deferred compensation should not be used as a strategy to avoid showing income for the purpose of a lower EFC. The second "A" in FAFSA does stand for "Aid" and this is meant for those that really need it. Financial aid administrators can use their own judgment to adjust income and they can also forward information to the proper authorities if they suspect that fraud is being attempted.