Traditional 401(k) Versus Roth 401(k)

[ssa...@gmail.com]

I am fortunate in that my employer offers both a Traditional 401(k)
and a Roth 401(k). However, I am wondering if there is any advantage
in choosing one over the other in terms of financial aid for college.

Specifically, contributions to a Traditional 401(k) are made pre-tax
and, as such, have the effect of lowering the AGI (Adjusted Gross
Income) on tax returns.

Contributions to the Roth 401(k) are made post-tax and, as such, have
no effect on the AGI.

On the surface it would appear that the Traditional 401(k) is more
beneficial towards getting financial aid, since it lowers the AGI. I
believe I have read in the past, though, that FAOs (Financial Aid
Officers) will treat contributions to either a Roth or Traditional
401(k) in such a way that they are considered "equally". That is, if
my AGI is lowered due to my contributions to a Traditional 401(k),
then prior to any financial aid offers, the FAO will "recalculate" my
AGI so as to add back in those contributions.

Am I correct and/or what are the financial aid advantages/
disadvantages (if any) in contributing to a Traditional 401(k) versus
a Roth 401(k)?

Thank you for any advice and information.
-Steve

[Steve Blank]

Steve,

Either way will produce about the same aid eligibility. While AGI is
part of the computation, it is actually your total available income -
income minus allowances - that counts, and retirement contributions are
not an allowance.

Pre-tax contributions to a 401(k) (or an IRA) are added back to your
available income by the financial aid formula to put you on an equal
footing with someone who used the after-tax versions, or didn't
contribute at all. This is done because retirement contributions are a
choice, you still had the same income as someone with identical data who
chose differently.

Make the 401(k) decision based on your tax and retirement needs, not
financial aid.

Steven B. Blank
College Financial Aid Consultants
29 Ives Hill Court
Cheshire, CT 06410
(203)250-7761