How Do I Avoid the Money in My Bank Disqualifying My Children From Financial Aid for College?

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If you’ve sent kids to college, you’ve probably heard of FAFSA (Free Application for Federal Student Aid).

FAFSA offers federal government aid via loans, grants and work-study options. It determines how much financial aid your children will get for college based on your family’s income and assets.

As a parent, that includes your income, investment accounts and bank accounts. If you want to make sure your child or children get as much aid from FAFSA as possible, what can you do?

That’s what a listener of the Clark Howard Podcast recently asked.

Can I Prevent My Emergency Fund From Limiting the Financial Aid My Child Gets From FAFSA?

Can I do anything with my emergency fund to make sure it doesn’t count against my child’s FAFSA aid for college?

That’s what a listener wanted to know on the April 19 podcast episode.

Asked David in Ohio: “I have two teens who I expect will be starting college in a few years. I have some money saved in 529 plans for them, but more saved in an emergency fund as everyone recommends. How do I avoid having my emergency fund disqualify them from financial aid when we complete the FAFSA?”

David is in luck. At least with the money in his emergency fund. There’s a way to keep it liquid and available for emergencies while also preventing it from penalizing his family during a FAFSA application.

He can put his emergency fund in a Roth IRA. The contribution limits for 2023 are $6,500 per individual if you’re younger than 50 and $7,500 if you’re at least 50 years old.

“You keep moving money from your emergency fund into your Roth IRA,” Clark says. “The money in the Roth, because it’s a retirement asset, is not considered as money that is used for college. It is for your retirement.

“Where money you have in savings, as you rightfully pointed out, hurts you on the FAFSA. Because your expected contribution is based on the assets you have.”

Why It’s OK To Put Your Emergency Fund in a Roth IRA Ahead of a FAFSA Application

Clark uses “emergency fund” and “rainy day fund” interchangeably.


You may wonder why it’s OK to move your emergency fund from one of the best high-yield online savings accounts, where it’s accessible whenever you need it, to a retirement account.

However, a Roth IRA is unique in that you can withdraw your contributions penalty-free at any time. You just can’t take out the profits you’ve made by investing that money willy-nilly.

“Isn’t that reckless? What happens if you need the money? Because it does rain and you need that money,” Clark says. “You are allowed to pull your contributions — not earnings — out of your Roth at any time.

“I don’t want people normally using a Roth IRA as a piggybank. But in the short term with the need you have to qualify for as much financial aid as possible for your teens, having your emergency fund inside your Roth is a better strategy.

“And then if you end up not having the rainy day, what have you done? You’ve now built up retirement savings that grows tax-free and is spent tax-free in retirement.”

Final Thoughts

It is possible to align your assets in such a way that you maximize the FAFSA funding you get for your kid’s college.

One major thing you can do is move your emergency fund to a Roth IRA. You can still withdraw that money at any time if you need it for a financial emergency. But retirement funds aren’t counted toward your assets that the federal government evaluates on a FAFSA application.

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