Our son is a junior in high school. I’ve heard that lowering the Adjusted Gross Income we declare on the FAFSA form should help our financial aid eligibility when he begins college. Is increasing my 401K contribution therefore a good strategy for getting more financial aid?
NO! In fact increasing your 401K contributions will not affect your eligibility one cent! The “strategy” of maxing out a 401K contribution in order to optimize financial aid is a misconception shared by many.
Now it’s true that your 401K contributions are indeed tax-deferred and will reduce your Adjusted Gross Income (AGI) dollar-for-dollar. But the FAFSA form asks about your “payments to tax-deferred pension and savings plans”. This amount is an “add-back” to your AGI on the FAFSA form.
While 401K contributions may provide a good tax strategy and savings plan for retirement, they offer nothing to improve your financial aid eligibility because of the FAFSA methodology.