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One commonly overlooked benefit of maximizing your 401(k) contribution is its impact on the Student Aid Index (SAI). For the 2026–2027 school year, retirement accounts remain one of the most effective "shelters" for family wealth.

1. Assets: The "Invisible" Account

Unlike standard savings or brokerage accounts, 401(k) balances are excluded from FAFSA asset calculations. While parents are expected to contribute up to 5.64% of their reportable assets, they are expected to contribute 0% of their 401(k) balance.

2. Income: The 2026 FAFSA Advantage

Under the 2026 FAFSA rules, the "add-back" of voluntary pre-tax 401(k) contributions has been removed. This means:

• Contributions lower your Adjusted Gross Income (AGI).
• Lower AGI directly reduces your SAI.
• In previous years, these contributions were added back as untaxed income; in 2026, they simply lower your reportable income, potentially making your child eligible for more need-based grants.

3. Borrowing for College: Risks to Consider

While most plans allow you to borrow up to $50,000 (or 50% of your vested balance), the risks in 2026 remain high:

• Repayment: If you leave or lose your job, you generally must pay the loan back by the next federal tax filing deadline to avoid a "deemed distribution."
• Tax & Penalties: Unpaid loans are taxed as income and face a 10% early-withdrawal penalty if you are under age 59-1/2.
• Opportunity Cost: The money borrowed is no longer invested in the market, potentially stalling your retirement growth during the loan term.