Moved a 401(k) to an IRA in 2025? Your Kid's FAFSA Counts It as Income Unless You Type In the Number

If you changed jobs in 2025 and moved your old 401(k) into an IRA, your kid’s FAFSA may be treating that money as income you lived on. You didn’t. The form won’t know that unless you tell it.

Most of the 2027-28 FAFSA fills itself in from your 2025 tax return. The rollover is one of the numbers it can’t fill in for you.

How a rollover turns into “income”

Here’s what they don’t tell you. IRS instructions say a rollover from an employer plan to an IRA, “including a direct rollover,” goes on line 5a of your 1040 as the full distribution. Line 5b, the taxable part, shows zero. You never touched a dime, and your tax return still shows a big gross number.

The FAFSA takes 5a minus 5b straight from the IRS and calls it “untaxed portions of pensions.” IRA rollovers do the same thing on lines 4a and 4b. The federal aid formula adds that number to parent income, then subtracts the rollover. But only the rollover amount somebody typed in.

The Education Department said so on October 23, in its verification notice for 2027-28. IRS-transferred income needs no further proof, except that “rollovers still need to be verified as they are manually entered.” Leave the rollover box empty and the formula subtracts zero.

What it costs you

The 2027-28 Student Aid Index guide sets the parent contribution from adjusted available income on a ladder. It starts at 22% and tops out at 47% of every dollar over $45,600.

Say your adjusted available income would be $20,000. That’s a parent contribution of $4,400. Now add a $60,000 rollover nobody subtracted. Adjusted available income jumps to $80,000, and the contribution becomes $12,336 plus 47% of $34,400, or $28,504.

That’s $24,104 of phantom SAI.

Federal law defines your need as cost of attendance, minus SAI, minus other aid. Every dollar of fake SAI is a dollar of need that disappears. Pell eligibility runs off the same SAI. On a $24,104 swing, that can be the difference between a grant and a loan.

The move

Pull your 2025 Form 1040 tonight. Look at lines 4a through 5b. If 4a or 5a is bigger than its “b” line, find the 1099-R. School rollover forms tell parents to take box 1 minus box 2a and treat the difference as a rollover when box 7 shows code G or H.

Enter that amount in the FAFSA’s rollover question. Already submitted? Log back in and correct it. The deadline is far off (for the current 2026-27 form, it’s September 11, 2027), but schools build aid offers from whatever number is on file now. Fix it before they do.

Expect a document request. The notice accepts a copy of your tax return or a signed statement confirming the rollover amount. Keep the 1099-R and the 5498 from the new IRA together.

Our FAFSA guide walks the rest of the form, and the financial aid guide explains how schools turn SAI into an offer. The same formula has a second blind spot that runs in your favor: work-study pay gets subtracted before the math starts.

The detail

The example uses Table A5 of the 2027-28 SAI guide and assumes the rollover is the only change, since income taxes paid and the other allowances don’t move with untaxed income. The need definition is section 471 of the Higher Education Act, 20 U.S.C. 1087kk.

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