Advanced Underwriting Consultants

Ask the Experts – July 21, 2014

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: I have a client whose son will be applying for financial aid as a college student soon. Does life insurance owned by my clients (the parents) count against him when determining his eligibility for financial aid?

Answer: No. When applying for financial aid, they will need to fill out a FAFSA. On the FAFSA, the parents and the student are required to list their investments, which will be taken into account in determining the student’s eligibility for financial aid. The instructions on the FAFSA provide the following:

Investments do not include the home you live in, the value of life insurance, retirement plans (401(k) plans, pension funds, annuities, non-educational IRAs, Keogh plans, etc.) or cash, savings and checking accounts already reported in questions 41 and 90.

Emphasis added. Therefore, purchasing life insurance, like contributing to a retirement plan, may be an effective way to minimize your client’s investments for student loan eligibility purposes.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Ask the Experts – February 26

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Will my client, the owner of a Roth IRA, age 50, incur income taxes and the 10-percent early distribution penalty if she uses the funds to pay for her child’s college tuition? She has owned the Roth IRA for the requisite 5 years.

Answer: She will incur income taxes on the gain portion of the distribution, but she should avoid the 10-percent penalty.

Roth IRA distributions are excludable from gross income if the owner has reached age 59½, died, become disabled, or if she used the proceeds for a first home purchase. Your client meets none of these qualifications, and so the gain portion of the distribution should be included in her gross income and subject to taxation.

However, even though the gain portion of the distribution is subject to ordinary income taxes, she shouldn’t face the 10-percent penalty. Under Section 72(t)(2)(E), the 10-percent penalty does not apply to distributions from Roth IRAs that are used to pay for qualified higher education expenses, such as college tuition.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.