FAFSA confusion: Do Roth IRA inheritance distributions count as income or assets?

The answer depends on when the distribution was received and what your daughter did with the money. For FAFSA purposes: - If the distribution was received in 2022, it won't be reported as income on the 2025-2026 FAFSA since that form will use 2023 tax information - Any money still remaining from that distribution would be reported as an asset if your daughter still has it in a bank account or other investment - Roth IRA distributions to beneficiaries are generally tax-free, so it likely wasn't even reported as taxable income on her 2022 taxes Basically, just report whatever amount is still left as an asset in the student's asset section. The good news is that student assets only affect the SAI calculation at a 20% rate compared to parent assets at 5.64%.

When my son got money from his grandma's retirement account, we had to count it as income in the year he got it AND as an asset after that. The financial aid office at his school asked for all kinds of documentation!! Make sure you keep the distribution paperwork. Also check if she got a 1099-R form for the distribution - that might affect how you report it.

This is a common misunderstanding with the FAFSA. For the 2025-2026 FAFSA, you'll be using 2023 tax information for income reporting, so the 2022 distribution won't be counted as income regardless of its tax status. However, any remaining money from that distribution WILL count as an asset when you complete the form. The FAFSA looks at assets as a snapshot of what you have at the time you complete the application. Since student assets are assessed at 20% in the SAI calculation, having $14,000 in savings could increase her SAI by about $2,800, potentially reducing need-based aid by that amount. You might want to consider using some of those funds for qualified education expenses before filing the FAFSA if maximizing aid is important.

I had EXACTLY the same situation last year with my son's inheritance from his grandmother's Roth IRA. We spent hours trying to get straight answers from FSA about how to report it. Kept getting disconnected or waiting forever on hold. Finally I discovered Claimyr (claimyr.com) which got me through to an actual FSA agent in about 15 minutes. They have a video showing how it works: https://youtu.be/TbC8dZQWYNQ The agent confirmed that for FAFSA, Roth IRA distributions to beneficiaries don't count as income on the tax return, so they don't affect the FAFSA income questions. But any money still sitting in accounts does count as an asset when you file.

Idk why everyones making this so complicated lol. roth ira money is AFTER tax anyway so its never counted as income for fafsa. just put whatever money she has left as an asset when you fill out the form. its not rocket science guys 🤷‍♂️

This is actually a bit more nuanced than some replies suggest. For inherited Roth IRAs: 1. Qualified distributions to beneficiaries are generally tax-free and won't show up as income on tax returns 2. However, non-qualified distributions may be partially taxable (the earnings portion) 3. For FAFSA purposes, the 2025-26 form uses 2023 tax information, so 2022 distributions won't affect the income section regardless 4. Any remaining funds count as an asset Also worth noting: the FAFSA simplification has changed some asset reporting, but student assets still have a much higher assessment rate than parent assets. Consider talking to a financial aid consultant who specializes in these situations if the amount is significant enough to potentially affect aid eligibility.

my daughter had same thing happen... we just used the money to buy her a car for college and paid for her first semester up front and then there wasnt much left to report lol. financial aid office never questioned anything.

Just to add one more important point - the exact reporting requirements can sometimes vary by school, especially if the school requires the CSS Profile in addition to the FAFSA. The CSS Profile asks for more detailed financial information and may have different rules about reporting inherited assets. If your daughter is applying to schools that require the CSS Profile, you might want to contact their financial aid offices directly to ask about their specific policies on inherited Roth IRA distributions.

I went through this exact situation two years ago when my son inherited money from his grandfather's Roth IRA. The key thing to remember is that the FAFSA timing matters a lot here. Since you're filing the 2025-26 FAFSA, you'll be using 2023 tax information for income reporting, so that 2022 distribution won't show up in the income section at all. For the asset reporting, you'll need to include whatever amount your daughter still has from that inheritance as of the day you file the FAFSA. The $14k mentioned in the comments would add about $2,800 to her Student Aid Index, which could reduce her aid eligibility. One strategy that worked for us was using some of the inherited funds for legitimate college expenses before filing - things like a laptop, textbooks, dorm supplies, or even paying the enrollment deposit. This reduced the reportable asset amount while still using the money for its intended purpose. Just make sure to keep all receipts in case you need to document the expenses later. Also, if any of her schools require the CSS Profile, double-check their specific requirements since they sometimes have different rules than the FAFSA for inherited assets.

As a financial aid advisor, I can confirm the advice given here is mostly accurate. For the 2025-26 FAFSA using 2023 tax data, that 2022 Roth IRA distribution won't appear in the income section. However, I want to emphasize a few key points: 1. Any remaining funds ($14k mentioned) will be assessed as student assets at 20%, potentially reducing aid by about $2,800 2. Using funds for legitimate educational expenses before filing is a valid strategy - this includes tuition deposits, required technology, textbooks, and even reasonable transportation needs 3. Keep detailed records of all purchases in case schools request verification 4. For schools requiring CSS Profile, contact their financial aid offices directly as they may have additional reporting requirements One thing I haven't seen mentioned: if your daughter qualifies for the simplified needs test (family AGI under $60,000 and eligible to file 1040EZ or meeting other criteria), assets aren't counted at all on the FAFSA. This could make the entire asset question moot depending on your family's income situation. The key is being honest and accurate while understanding the rules to make informed decisions about timing your FAFSA filing.