The Surprising FAFSA/SAI and Roth IRA Conflict that Almost Sabotaged Our Financial Aid Plan

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Updated: 08/27/25

We’re closing in on the end of my 7th year of early retirement. I was fortunate enough to run my last day on the hamster wheel on December 31, 2018.

At the time, I had a plan and was confident it would work (though there’s always that tiny bit of self-doubt!). Fortunately, it’s worked better than we could have expected, thanks in part to retiring at a time when the stock market has continued to climb with only a few dips over the years. With every passing year, the worry about the sequence of returns risk continues to go down.

So, we’re now in an even better position than when we started, and I feel absolutely blessed… but that doesn’t mean plans don’t change.

When we started our early retirement, we were able to do our best to maximize ACA subsidies alongside the Roth IRA conversion ladder as part of our plan. Life was good, and so were the enhanced premium tax credits we were getting as part of our Affordable Care Act (ACA) health insurance. Every year, do the math at the end of the year, do a Roth conversion accordingly, and then just rinse and repeat.

Well, it’s like the saying goes, “The only constant in life is change.” Times change, so you need to adapt or you’re going to be swept away.

The two big changes for us that my crystal ball is showing are:

1. Those enhanced premium tax credits are going to sunset at the end of 2025 (unless a completely unlikely step-in from Congress changes that).
2. Our daughter is just about to start her sophomore year of high school (still homeschooling). That means she’s getting closer to starting college, joining millions who are inundated with student loans and needing to come up with a good chunk of money up front, now called your Student Aid Index or SAI (previously the Expected Family Contribution).

So, I could either just roll my eyes, accept these circumstances, and move on… or I can come up with a new plan to “fix” both of these problems as best I can.

Yeah, you probably guessed – I’m all about adapting and trying to turn things in our favor.

I was so confident in our new plan that I had recently spent a lot of time writing a blog post about it… but then I suddenly had to pull back the reins on publishing it. I thought I had figured out an easy way to maximize for ACA subsidies and for the FAFSA/SAI as an early retiree.

The problem was that as I dug deeper into things, I stumbled onto a massive problem – a major complication that took me by shock and almost ruined my big plan.

So I’m going to tell you about what we had planned for the next handful of years to optimize for ACA subsidies and FAFSA/SAI, the huge issue that crushed my blueprint, and the new tentative plan to do our best to compensate for this issue. Of course, if you have any thoughts or knowledge on this subject, I’d love to hear ’em!

As a side note, this post will also serve as Phase 2 in helping our daughter get through college with the least amount of debt possible. The first post was Phase 1: Powerful Strategies to Earn College Credits While Homeschooling.

Some quick background to get you up to speed…

I’ve been fortunate to be an early retiree (retired at age 43, seven years ago). Years ago, I had a fantastic CFP until he moved to an AUM-only model, which wasn’t what I needed. Anyway, he had helped tweak our long-term financial plan, and our portfolio has continued to grow faster than our spending over the years, which has been great.

We’re a household of three:

• Little old me rocking it out at 50 years old now.
• My wife, Lisa, who refuses to get out of her forties… your time will come, woman!
• Our daughter, who’s now 15 and in her sophomore year of high school.

Our current net worth is holding steady at more than $1.9 million. We keep getting close to that fancy-pants $2 million mark – almost there!

I’ve been keeping track of our net worth and our investments with the Empower Dashboard for close to 10 years now. It’s free and I’ve never found anything easier and better. You can check out Empower here if you’re looking for a great way to do the same.

We sold our house in 2019 before we moved to Panama and have rented ever since. I have no desire to own again. I love being able to make a call when there’s an issue and the ability to wrap up a lease and move on when we want to (which we’ve done several times already).

So, while that means we don’t have to be a part of the argument over whether or not to include your home equity in your net worth, it does mean we’ll never have a paid-off residence, so rent will always be part of our cost of living.

Our portfolio/bank accounts basically break down like this:

Traditional IRA accounts (rolled from our old 401(k) plans)	$1.2 million
Roth IRA accounts	$625k
Taxable brokerage account	$30k
HSA account	$60k
Online savings	$25k
Checking account	$2,500

The majority of our portfolio is in my rollover IRA (from my old 401(k) account), which currently has a value of over $1.1 million. We’ve been doing a Roth IRA conversion ladder since my first year of retirement in 2019. While those conversions have been baking for their rolling 5-year timeline before we can withdraw the funds penalty-free, we’ve been using money from our savings and taxable brokerage account to fund our expenses (which amounts to ~$60-65k/year).

We’ve been able to take advantage of the enhanced ACA subsidies for our healthcare with current premiums of about $330/month for the three of us. Yeah, you read that right – that’s the total for all three of us. Not too shabby, right?

In the meantime, our daughter is a sophomore in high school this year. She’s still homeschooling and wants to finish high school while continuing that route. She’s also planning to do some dual enrollment classes over the next few years until she graduates. I talked about this in my post Phase 1: Powerful Strategies to Earn College Credits While Homeschooling.

As of now, she wants to attend North Carolina State University after graduation. However, she’ll probably get some of her core requirements out of the way with community college first. To help with this (and to get us out of the Ohio winters!), we’re likely moving to North Carolina by the spring of 2027. That will make us NC residents (you need to be there 1 year to qualify) so she’ll be able to get in-state tuition when she starts college in the fall of 2028.

We’ll also be applying for North Carolina’s C3 program in the spring of 2028, which should mean auto-acceptance into NCSU. Thanks to Justin at Root of Good for reaching out and turning me onto that one! One of the requirements, though, is that she would need to get her Associate’s from a NC community college first, so she’d do that for a couple of years before attending NCSU.

The FAFSA lookback period is the “prior to prior year” (I’m not making that phrase up!). So with our daughter planning to start college in 2028, the first year that the FAFSA is going to be looking at is 2026. That means that any money changes I want to make beforehand need to be done by… well, this year. Yikes!

Life goes on… and the massive snag in the process I didn’t know about

We’re now entering an interesting time in our lives with

1. Extended ACA subsidies expected to end at the end of this year
2. Our daughter is starting her sophomore year of high school with FAFSA look-back years starting next year.

Planning for these changes is a little tricky. Essentially, I want to do the following:

• Maximize for FAFSA/SAI for our daughter’s college plans.
• Maximize for ACA subsidies.
• Ensure we have enough money to live off of over the next several years.

Three simple bullet points – how hard can it be, right?

The struggle with trying to do all of these originates from a few factors:

• Any money moves we make from 2026 through 2030 will affect our daughter’s FAFSA eligibility.
• We want to keep our income as low as we can to get the maximum ACA subsidies. However, we need to have at least ~$35k/yr in income to safely ensure we don’t fall into Medicaid territory. So that more than likely means a Roth IRA conversion of $35k/year to meet that minimum.
• We’re about to start doing qualified Roth IRA distributions each year to cover our annual expenses. We don’t have enough money in our savings/taxable accounts to cover our expenses over the next 4 years to allow us not to take Roth distributions during this time.

Initially, I anticipated us being in great shape with the $35k/year in Roth IRA conversions over the next 4 years. That would keep our income low, but not too low, and we would satisfy everything we needed and live happily ever after. Ah, life is good.

The big surprise to me though was finding out that, although Roth IRA distributions don’t count as income with the ACA subsidy formula, they DO count as income for FAFSA/SAI. Wait, what?!!

Essentially, I had anticipated that all the money in our Roth IRA was sheltered from most everything. I just naively expected that taking the money out would not affect anything we did… kind of like how it doesn’t count as income for ACA subsidies. But I was badly mistaken, and having those Roth IRA distributions count as income is a real kick in the shins.

That sort of took the wind out of my sails because we’re now looking at a lot more money counting as income every year for FAFSA/SAI. Instead of being “poor on paper” with just the $35k Roth IRA conversion each year, we would also have a Roth IRA distribution of around $60k-65k to cover our expenses. In other words, instead of just having a $35k/year income stream for FAFSA/SAI, that idea makes it look like ~$100k. Ouch.

The new and sort of improved plan

I’ve been struggling to figure out a solution to this. I’ve worked with a few of the different AIs for hours upon hours in trying to figure out the best way to do things. I also spent time correcting the AIs when they gave out blatantly wrong information. These AI tools can be extremely useful and powerful, but only if you know enough to keep them in check.

I don’t think there’s a great way to explain this, but I’m gonna do my best. Not a ton has changed, but here’s the general idea of my “the best I could figure out to do right now” plan:

• Take advantage of the next few months to make our money moves since this is the last year not affected by the FAFSA/SAI lookback.
  • Clear out the money from our daughter’s taxable brokerage account. We’ll blend that into our spending money for now and track the growth of that “loan” from her so we can pay it back later. That will eliminate all countable assets for our daughter for FAFSA/SAI.
  • Clear out the remainder of our own taxable brokerage account. We don’t have a lot left in it anyway. That’ll leave us with just our checking/savings and retirement accounts being counted for assets. Most of the FAFSA applications we do will be later in the year, too, so those accounts should be about 3/4 of the way empty by that time each year since I fill them at the beginning of each year for our spending money.
  • Do a qualified Roth distribution of everything we can pull with no penalty right now in order to lessen the distribution amounts needed during the years FAFSA looks at. Assets affect the FAFSA/SAI a lot less than income, so it’s better to do it now and have it sit versus draw it as an income distribution later. Unfortunately, we’re at the beginning of the ladder rungs that are marked as qualified, so we only have about $105k we can take out right now without penalty. Every year hereafter, there will continue to be some money we can take out.
  • Use the money from the taxable accounts and the bigger Roth distribution from this year first. Then we’ll try to smooth out the ride for the next four years to keep the distributions as low as we can.
• Ensure we do the smallest amount possible on Roth IRA conversions each year to aim for the maximum ACA subsidies we can get without slipping into Medicaid territory. I’m guessing that should be about $35k/year. These count as income for both the ACA subsidies and on the FAFSA/SAI numbers.
• Do a Roth IRA distribution each year to make sure we have enough money to live off of. These count as income for just the FAFSA/SAI numbers and not the ACA.
• Put a new plan into action after the FAFSA look-back years have passed.
  • Since we’re switching to such small Roth IRA conversions over these years, that really messes up our Roth IRA conversion ladder. Living off the $35k/year that’ll be available in 5 years after each isn’t the direction we want to go.
  • Instead, we’ll plan on utilizing a combination of those small Roth IRA amounts from the ladder, plus we’ll likely start 72t SEPP distributions for the 5-year minimum. As we get closer and know exactly where we stand, I’ll work the formula backward to determine the starting pile of money needed to equal (therabouts) what we want from the distributions for those years. Then I’ll roll that amount into a separate IRA to use for the SEPP distributions.

Hopefully that wasn’t too confusing. Here’s a simplified schedule of the plan…

Year	Event	Amount	Affects
2025	Last year that doesn’t affect our FAFSA/SAI calculations
	Clear out our daughter’s savings and taxable brokerage accounts
	Clear out our taxable brokerage account
	Roth distribution (all qualified $)	$105,000	FASFSA/SAI
	Roth IRA conversion	$50,000	FASFSA/SAI / ACA
2026	Affects FAFSA/SAI in 2028
	Roth distribution	$25,000	FASFSA/SAI
	Roth IRA conversion	$35,000	FASFSA/SAI / ACA
2027	Affects FAFSA/SAI in 2029
	Move to North Carolina to establish residency
	Roth distribution	$55,000	FASFSA/SAI
	Roth IRA conversion	$35,000	FASFSA/SAI / ACA
2028	Affects FAFSA/SAI in 2030
	Roth distribution	$40,000	FASFSA/SAI
	Roth IRA conversion	$35,000	FASFSA/SAI / ACA
	File First FAFSA/C3 (uses 2026 data)
	Our daughter starts community college (Year 1)
2029	Affects FAFSA/SAI in 2031
	Roth distribution	$40,000	FASFSA/SAI
	Roth IRA conversion	$35,000	FASFSA/SAI / ACA
	Our daughter starts community college (Year 2)
	File Second FAFSA (uses 2027 data)
2030	First year that doesn’t affect our FAFSA/SAI calculations again (assuming she graduates in 4 years)
	Roth distribution	$75,000	FASFSA/SAI
	Roth IRA conversion	$35,000	FASFSA/SAI / ACA
	Our daughter starts at NCSU (Year 1)
	File Third FAFSA (uses 2028 data)
2031
	Roth distribution	$75,000	FASFSA/SAI
	Roth IRA conversion	$35,000	FASFSA/SAI / ACA
	Our daughter starts NCSU (Year 2)
	File Fourth FAFSA (uses 2029 data)
2032	… and beyond
	Our daughter graduates NCSU
	Roth distribution	$35,000
	Roth IRA conversion	$35,000
	72t SEPP distribution	$40,000

I wish I could take out more as Roth IRA distributions in the first couple of FAFSA-counted years because she’ll most likely be attending community college and those costs are so much more manageable. Even without any financial aid, the community colleges in the C3 program seem to range from $2,000 to $2,800 per year for North Carolina residents.

Unfortunately, I’m not going to have access to enough qualified dividends that baked for the 5 years necessary for the conversions until later. In 2025, 2026, and 2027, I’m completely depleting the Roth accounts of the money I can pull out without penalty each time.

So for the time being, it looks like our income for the FAFSA/SAI years will be in the ballpark of:

• 2026: $60k
• 2027: $90k
• 2028: $75k
• 2029: $75k

While these aren’t crazy high numbers, they will have a much more significant effect on her financial aid than they would have been if Roth IRA distributions weren’t part of the equation. Income isn’t the only component in determining your AGI for FAFSA, but I haven’t figured out any allowed adjustments for our situation (yet!) that we could use to bring these numbers down much, if at all.

I haven’t determined if qualified Roth IRA distributions also count against you for North Carolina’s C3 program. However, the program focuses on applicants from low-to-moderate income households up to $110,000, so we should be good on that front either way. Hopefully, she’ll get into that program to at least guarantee acceptance into NCSU when the time comes.

An epiphany to make it tremendously better

After writing this post, I continued to dwell on the subject and then I looked at things from a different angle. That helped me come up with what will hopefully turn out to be a great idea.

I can’t think of a way to control the money we have coming in on the Roth IRA distribution side of things – we need money to live from. Heck, even if we got *gasp* jobs to bring down the Roth distribution numbers, we’d still have the income from the jobs, making it not much, if any, better.

We could spend less so we wouldn’t have to take out as much with the Roth distributions, but we’re already living relatively lean. I’m sure we could cut some corners, but it’s not like we live too extravagantly right now. And even if we did, it wouldn’t make a significant difference overall.

In other words, I think the Roth IRA distributions are what they are.

But… what about the Roth IRA conversions? We’re planning to do $35k in conversions each year just to avoid falling into the Medicare zone with the ACA. Seems reasonable enough.

However, I started to think, “What if we jump off the ACA for health insurance?”

That would allow us to skip doing the Roth IRA conversions completely – that’s $35k removed from our income just like that!

The idea of going off the ACA sounds a little scary at first, but we wouldn’t be rolling naked (thought I’d use that phrase to conjure up a nice visual). Instead, we’d look at joining a health sharing ministry. We did that for a short while after I first retired and before we moved to Panama. It worked well enough.

It’s not perfect and there are some downsides, but it does the job (hopefully). And I honestly don’t really care about how the FAFSA/SAI numbers play out for our daughter’s time at community college. At ~$2,500/year, that’s easy peasy. NCSU is where it matters – that’s where we’re talking big money (maybe ~$30k/year with room and board).

So the new thought is to keep following most of the plan I talked about before, but then in 2028-2029 (the years that will count toward our daughter’s 2030-2031 NCSU years), we’ll go a different route.

For 2028-2029, we’ll bail on ACA health coverage, sign up for a health sharing ministry, and not do any Roth IRA conversions. That will bring our income for FAFSA/SAI down to around $40k each year for 2028 and 2029.

I ran this through some of the SAI calculators and that should give us a negative SAI or close to it. That’s huge! That will also kick up her Pell grant eligibility dramatically. That’s a big deal since that doesn’t need to be paid back at all.

And we can just plan our 72t SEPP distribution numbers accordingly for after the FAFSA/SAI years.

This was a big eureka moment and I feel like I can breathe again. My goal is to help our daughter graduate without being crushed in student loan debt, and this should be the key to most of that.

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The one element to consider with all of this happens to be the same thing I mentioned at the beginning of this post – times change and you need to adapt.

I can’t say what the FAFSA/SAI formulas will be in a couple of years. I don’t know if the Roth IRA conversions will even count later. I don’t know how the ACA will be structured then. I also don’t know how the health sharing ministries will work then – there might be even better solutions (or worse).

And, of course, our daughter could change her mind about where to go to school, or she may decide not to go at all. The tuition can and will change. Maybe North Carolina’s C3 program changes or disappears.

There’s no way to have a plan and expect nothing to change… but at least we have a game plan based on what we know today. And then we’ll adapt as needed.

In the meantime, I try not to put all our eggs in one basket. Some of my other random thoughts:

• For planning, I initially had in my head a single Roth IRA distribution each year for our annual spending. However, to optimize for our FAFSA/SAI numbers, it’s probably much more prudent to do it in amounts that ensure we end with close to nothing in our checking/savings for the FAFSA application and then do another distribution for the remainder of the year after that’s complete.
• Our spending could change. We might be able to make some slight changes along the way (spending a little less one year so we don’t need as much from Roth IRA distributions the next, for example). With us toning back the travel plans a little throughout the next few years, that could make a difference.
• Our daughter’s starting dual-enrollment classes soon to knock out some of the time/costs in college.
• She’s most likely going to do community college for what she can for her core requirements.
• Our daughter does well in school. We’ll be pushing her to go after as many grants and scholarships as possible – for grades, our income level, and any other opportunity possible.
• We’ll dig into any grant programs offered by North Carolina.
• Additionally, we’ve got a small amount (very small) in her 529 plan of about $32k.

This plan is far from being written in stone, and I’m certainly open to suggestions. What do you think?

Here are the posts I’ve written so far on our strategy to keep our daughter’s college costs low:

• Phase 1: Powerful Strategies to Earn College Credits While Homeschooling
• (Phase 2:) The Surprising FAFSA/SAI and Roth IRA Conflict that Almost Sabotaged Our Financial Aid Plan

The next area I hope to add to this (Phase 3) will focus on grants and scholarships.

If you enjoyed this post, consider hopping onto my email list. I’ll keep you in the loop when new posts come out, and I’ll even send you a bunch of cool and useful spreadsheet freebies just for signing up. Come on… you know you want to!

Plan well, take action, and live your best life!

Thanks for reading!!

— Jim