401k contributions impact on FAFSA income threshold - will it help get below $50k limit?

yep your 401k will definitely reduce your AGI for fafsa! thats what we did last year - maxed out retirement contributions to drop income. but i think the threshold is actually $60k now not $50k. not 100% sure bout the student income part tho

To answer your questions accurately: 1) Yes, contributing to your 401k will reduce your Adjusted Gross Income (AGI) for FAFSA purposes. Traditional 401k contributions are pre-tax and directly lower your AGI. This could help you qualify for the Student Aid Index (SAI) simplified formula if you get below the income threshold. For 2025-2026, that threshold is projected to be around $60,000, though this may change. 2) If your family qualifies for the simplified formula, your daughter's income will still be assessed, but at a lower rate. Student income above the protection allowance (currently $9,400, but likely to increase slightly for 2025-2026) will be assessed at 50%. So her income will still count, just less severely than it might otherwise. One important note: If your income is low enough to qualify for an automatic zero SAI (projected to be around $41,000 for 2025-2026), then neither your assets nor your daughter's income would be counted at all.

@profile7 - Yes, if the parent's income is below the automatic zero SAI threshold (currently around $41,000 but will adjust for 2025-2026), then the student's income is not factored into the calculation. This is one of the significant advantages of the auto-zero SAI qualification. However, keep in mind this only applies to federal aid calculations - institutional aid and scholarships may have different formulas.

I went through this exact same situation last year with my son. The FAFSA system is SOOO FRUSTRATING!!!! I spent weeks trying to figure out these same questions. What I learned is that when they look at your income, they're looking at your AGI from your tax return, NOT your gross income. So YES, 401k contributions will help lower that number. But here's the thing - the income thresholds and calculations changed with the new FAFSA. I was told by our financial aid advisor that the simplified needs threshold is now $60k and the auto-zero is $41k. But I've also read it might increase with inflation for 2025-2026. For your daughter's income - EVEN WITH the simplified formula, her income above the protection allowance still counts! Don't make the same mistake I did thinking it wouldn't matter. The only way her income doesn't count is if you qualify for the automatic zero EFC (now called SAI).

We actually had him put some of his earnings into a Roth IRA (which doesn't count as an asset on FAFSA). But honestly, we didn't qualify for the simplified formula anyway because our AGI was too high even after 401k contributions. One thing our advisor told us too late - if you own a business or farm, there's an additional simplified needs qualification pathway with a higher income threshold (like $150k or something). But that doesn't help us regular W-2 employees.

If you're struggling to get information directly from Federal Student Aid, I highly recommend using Claimyr (claimyr.com). I had similar questions about the income thresholds for the new FAFSA and spent days trying to get through to an agent on the phone. Claimyr connected me to a real FSA agent in about 20 minutes who explained everything about the simplified formula and auto-zero SAI calculations for my situation. You can see how it works in their video demo: https://youtu.be/TbC8dZQWYNQ The agent confirmed that retirement contributions do reduce your AGI for FAFSA purposes and gave me the exact threshold numbers for the upcoming application year.

As a financial aid administrator, I can share a few additional details that might help you plan: 1) 401k contributions absolutely reduce your AGI for FAFSA purposes, and this is a legitimate planning strategy many parents use. Remember that for the 2025-2026 FAFSA, they'll be looking at your 2024 tax year information. 2) The simplified needs formula threshold is currently $60,000 and the auto-zero SAI threshold is $41,000. Both are indexed to inflation, so they will likely increase slightly for 2025-2026. 3) For student income: Under the regular formula, income above the protection allowance ($9,400 currently) is assessed at 50%. Under the simplified formula, it's the same assessment rate. Only under auto-zero SAI is student income not counted at all. 4) One planning consideration: If you're close to the auto-zero threshold, additional retirement contributions might save you much more in financial aid than the tax benefits alone would suggest.

my brother tried doin this 401k thing to get better financial aid but he still got barely anything. the whole system is rigged i swear. they have all these "simplified" formulas but at the end of the day unless ur literally poverty level they dont give u squat. my niece is working 30 hrs a week just to afford books!!! such bs

@profile3 - Correct, you've got it exactly right. If your AGI is below the auto-zero threshold, your daughter's income won't be counted at all. Between the auto-zero and simplified formula thresholds, her income above the protection allowance will be assessed at 50%. Above the simplified formula threshold, your assets will also be factored in. One important planning note: If you're married filing jointly, consider how close you are to these thresholds. Sometimes additional retirement contributions (even beyond your employer match) can be very beneficial if they get you under a key threshold. The effective "return" on those contributions could be much higher than standard investment returns if they significantly increase your aid eligibility.

@profile3 - A $15k increase in 401k contributions to get below the auto-zero threshold could potentially be very beneficial. Quick math: If your daughter earns $15k and the protection allowance is $9.4k, then $5.6k would be assessed at 50%, meaning about $2.8k added to your SAI. Over four years of college, that's potentially $11.2k in additional aid eligibility just from that component. Combine that with the tax advantages of the additional 401k contributions and the fact that assets aren't counted under auto-zero, and it could definitely be worth considering - especially if you're planning for retirement anyway. Just make sure you keep enough cash flow for current expenses!

Just wanted to add one more consideration for your planning - make sure you're also thinking about state financial aid programs if your state offers them. Some states have their own income thresholds and formulas that might be different from the federal FAFSA calculations. In my state, they actually use a slightly different methodology for determining aid eligibility, so even if you optimize for the federal auto-zero SAI threshold, it might not have the same impact on state grants. Worth checking with your state's higher education agency or your daughter's target schools to see if they have additional aid programs with different income requirements. Good luck with your planning - sounds like you're being really strategic about this!