The formula for college financial aid is complicated but the underlying premise is straightforward. The more assets and income you have, the less aid your children will receive. Therefore, you should make an effort to hold down your income and assets when a child is applying for aid. Tactics to consider:
* Don’t take gains. If you sell assets held in a taxable account in 2012, for instance, you’ll boost your taxable income this year. This can reduce the financial aid you’ll receive if you’ll have a student applying for aid in 2013. Remember, you’ll probably have to apply for aid each year so you should try to minimize capital gains while your children are high school seniors and college students.
* Avoid Roth IRA conversions. Again, moving money from a traditional IRA to a Roth IRA will trigger taxable income and possibly reduce financial aid.
If you need to take gains, try to do so before your children are high school seniors; then wait to take more gains until they’re finishing up college and no more aid will be forthcoming. The same is true for Roth IRA conversions.