Originally Posted by indigo
Originally Posted by 22B
Originally Posted by intparent
They aren't included for the means test, but then they also aren't available to pay tuition.
What exactly are you referring to here?
Not included in the means test = FAFSA pretends you do not have this money, it is not considered in the calculation of your Estimated Family Contribution (EFC). Means = financial resources or assets

Not available to pay tuition = Withdrawals from 401K accounts are typically not allowed until age 59-1/2. Withdrawing from 401K accounts early typically incurs a hefty penalty. When 401K funds are withdrawn to make them available to pay tuition, the amount of the withdrawal is taxable income, and is used in calculating the EFC.

Okay, if you assume that by "they" intparent means "retirement accounts in general", then "not available to pay tuition" is not true in many cases.

[It is true that if you withdraw from retirement accounts, you pay a 10% penalty (on top of any income taxes that apply, and it is almost always a very bad idea to do this. Also spending money that you need for retirement on something else is also a very bad idea.]

If the parent of the college student is at least 59.5 they can withdraw from retirement accounts penalty free.

For some accounts they can withdraw from those retirement accounts penalty free if they are at least 55, if separated from their employer.

For 457 plans they can withdraw from that retirement accounts penalty free at any age, if separated from their employer.

Roth contributions can be withdrawn at any time penalty free (and tax free).

For the non-Roth ones, the withdrawals will be income which will be taxed (and can affect many other things). And all withdrawals (even Roth ones) will affect FAFSA so you have to do the analysis. A Roth account is a very bad place to do college saving if you are planning to withdraw funds while the student is in college (except maybe the last year).

There is a more indirect sense in which the statement "retirement accounts aren't available to pay tuition" is not really right. Money is fungible, even though it can be place in containers with many restrictions and conditions. If you contribute as much as possible to retirement accounts (rather than directing some of those savings to college savings), then when it comes time to pay for college, your retirement savings picture is stronger, (and your FAFSA assets are less) and you can more afford to pay for college out of your salary, forgoing retirement contributions during those college years if necessary. Having more money in your retirement accounts puts you in a better financial situation overall, and so better able to afford college, using accesible funds, without jeopardizing retirement.