FAFSA confusion: Should my daughter report ROTH IRA inheritance as income or asset?

Thank you! This is such a relief. She has about $12k of it left in a savings account - I'm assuming that would count as an asset then? The distribution was definitely reported as non-taxable on her 2022 taxes.

While regular inheritances and Roth IRA inheritances have different tax treatments, you're correct that for FAFSA purposes, they're generally treated similarly. The key is whether the money was taxable income when received. Most inherited assets don't count as income for FAFSA, but any remaining money does count as an asset.

Oh no, that sounds stressful! Was your situation with a Roth IRA distribution too? What documentation did they ask for during verification?

Yes, almost identical! They wanted her full tax return, documentation of the distribution, and a letter explaining the inheritance. It took WEEKS to resolve and delayed her aid package. Make sure you have all that ready just in case.

You're absolutely right - that's an excellent point! For the 2025-2026 FAFSA, they'll be looking at 2023 income data (the prior-prior year). So a 2022 distribution wouldn't affect the income reporting at all. The only consideration would be if any of that money is still in a bank account, as it would count as a current asset.

Thank you! She still has about $12k left from it. I'll make sure we have all the documentation ready in case they ask questions. Should we proactively explain this somewhere on the FAFSA or just wait to see if they ask?

There's no specific place on the FAFSA to explain asset sources, so I'd recommend just waiting. If she's selected for verification or if the financial aid office has questions, then provide the explanation and documentation. About 30% of FAFSA filers get selected for verification anyway, so it's good to be prepared regardless.

I was stuck in the same situation a few weeks ago! I was about to give up when someone recommended using Claimyr to get through to FSA. It connects you with FAFSA agents without the wait. I was skeptical but it worked - got through in about 10 minutes instead of hours on hold. You can see how it works at claimyr.com or check out their demo video at https://youtu.be/TbC8dZQWYNQ. Definitely helped with getting a definitive answer about some unusual income situations we had.

That's really helpful information! I hadn't thought about contacting the schools directly. Did that approach work well for your niece?

Yes! Two of the three schools adjusted her aid package after reviewing the form. The third one didn't, but she ended up going to one that did adjust it. Definitely worth asking about!

Oh wow, I didn't realize the difference in how they assess student vs. parent assets. Is it too late to move that money somewhere else? We haven't filed the FAFSA yet for next year.

It's not too late if you haven't filed yet. The FAFSA looks at assets as of the day you file. Converting student assets to parent assets or into certain types of investments before filing can significantly improve aid eligibility. A 529 owned by the parent is one option, but there may be others depending on your specific situation. You might want to consult with a financial aid advisor before making any moves.

Yes, unfortunately that's exactly how the FAFSA works. Student assets are assessed at 20% while parent assets are assessed at a maximum of 5.64%. It's designed this way because the system assumes students should use most of their money for education, while parents have other financial responsibilities. It's not necessarily fair, but it is how the formula works.

This is a really important point that I hadn't considered! So even though the 2022 distribution won't affect this year's FAFSA, future required distributions could impact aid eligibility down the road? That's something we definitely need to plan for. Do you know if there's flexibility in how much she takes each year within that 10-year window, or does it have to be evenly distributed?