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 2011-2012 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.
When you renew FAFSA (on the FAFSA website) you will 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 to know your FAFSA PIN from the previous year.
Non-Retirement FAFSA Deferred Compensation
There are recognized cases where compensation is deferred until a later time. Some of these are:
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:
Check your FAFSA deadline to give yourself plenty of time to understand how to report your finances. Before you file, familiarize yourself with the FAFSA application. If you file online, you will not be able to move from one section to the next, without completing the first one.
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.
Besides, whether your deferred income is counted as income or an asset on the FAFSA, your college will still make its own determination about how it will count towards institutional aid, as shown here.
You can appeal your financial aid for college, by asking your school to adjust the EFC data elements to lower your income and/or assets which are deferred. A financial aid administrator can do this by making FAFSA corrections.
Deferred compensation is income that may or may not be taxed, but will definitely be added to your adjusted gross income (AGI) when calculating your FAFSA EFC number.
