If possible, you should try to avoid withdrawals from qualified retirement accounts, annuities, or life insurance cash value until after the final financial aid form is filed. Taxable, as well as non-taxable, withdrawals from these accounts will reduce financial aid eligibility. Loans from these accounts, if permitted, will not affect financial aid eligibility. Non-taxable rollovers should also be considered.
Susan is eligible for financial aid. Susans parents decide to use $10,000 of cash value in their life insurance policy to help pay for college costs. If they do so, the entire $10,000 will be included as income on their financial aid form even though a portion of it is non-taxable. Susan will lose $4,700 in financial aid eligibility in the following year due to this move. Susans parents would have been better suited to take a loan on the policy (if permitted) or to take a different loan to pay the costs and then use the cash value in the policy to pay off the loan after financial aid years.
If you are in a financial aid income assessment rate of 47%, you could increase your financial aid eligibility up to $470 for every $1,000 of income reduction by avoiding withdrawals from retirement accounts.