Over the years, financial planners have gone all-in on Roths. And I get it. Pay the tax now, let the money grow, and pull it out tax-free in retirement? Sounds like a dream. I’ve told plenty of clients the same thing. It is a smart move—most of the time.
But here’s what doesn’t get talked about enough: college is coming.
And if your kid is a sophomore or junior right now, and you’re putting money into a Roth 401(k), you might be unintentionally costing yourself financial aid—like, thousands of dollars in aid.
Here’s why: Roth 401(k) contributions don’t reduce your AGI (Adjusted Gross Income). FAFSA, the form colleges use to figure out how much you can pay, is all about your AGI. If it’s high, they expect you to shell out more. It doesn’t care that you’re saving for retirement. It doesn’t give you bonus points for using a Roth. It just sees your full income and says, “Cool, you’re rich.”
Meanwhile, if you were using a traditional 401(k), your AGI would be lower. Lower AGI = better shot at needs-based aid. It’s that simple.
I’ve seen families with good intentions—saving into Roths, doing everything “right”—get totally blindsided when the financial aid letters come in. And the thing is, the Roth feels safe. You can pull out contributions if you need to. No penalty. But none of that helps if it’s raising your AGI and killing your aid chances.
So if college is even remotely on the horizon—within 2 to 5 years—it’s worth rethinking the strategy. This isn’t about beating the system; it’s about understanding how it works.
Want to know what your AGI is doing to your kid’s financial aid odds? I can walk you through it. No sales pitch, just real talk.
Shoot me a message if you want to take a look.
– James