Understanding FAFSA Changes and College Savings Strategies: Ask the Hammer: Should I Save More in My 401k To Boost My Financial Aid? In this episode of “Ask the Hammer,” the focus is on the complexities of financing college education, particularly in light of changes to the FAFSA (Free Application for Federal Student Aid) application, understanding FAFSA changes and how savings in different types of accounts, like 401(k)s and 529 plans, can impact financial aid.

In the this “Ask the Hammer,” a reader asks: I’ve read that the new FAFSA application changes the formula for financial aid and that saving more in my 401(k) could boost my financial aid. How so?

All of this is to say, ultimately, people shouldn’t immediately assume that these alterations are inherently bad. To return to the question at hand, though, there are benefits and drawbacks to saving in a 401(k) with collegiate expenditures in mind.

One plus of taking advantage of a 401(k) is that it’s excluded from being counted on the FAFSA form, meaning that it’s effectively eliminated from an asset standpoint. A downside of using money from a 401(k) to fund a student’s education, though, is that you’ll have to add it as income and deal with the potential tax liability of doing so.

With that in mind, for the vast majority, sticking with a 529 plan or even a Roth IRA, which includes an education expense exception for early withdrawals, is likely best.

Watch this episode of Ask The Hammer to help you with understanding FAFSA changes and college savings strategies. Catch all of the Ask The Hammer episodes at this link: https://www.finstream.tv/videos/ask-the-hammer/