It’s not unusual for different strategies to be more helpful at different points in the college savings/funding process. Retirement contributions are a perfect example.
For many families, it’s beneficial to use Roth contributions in FAFSA years because the additional taxes paid reduce EFC. Taxes paid are subtracted from available income, so a family in the 22% tax bracket who maxes out Roth IRAs instead of traditional IRAs for both spouses would see their EFC reduced by $1,240. ($12,000 x 22% marginal tax rate x 47% marginal EFC income assessment rate = $1,240.)
However, if that family is approaching the income limit for the American Opportunity Tax Credit (MAGI of $160,000 for married filing joint in 2019), then contributing to Roth IRAs in a year in which their student is in college might leave them unable to claim the AOTC. The AOTC is worth up to $2,500 per year, per student, so it’s often worth more than the EFC savings. But there may be circumstances where parents want to do additional analysis, such as if the student is at a financial aid “threshold” amount where adding $1,200 to their EFC would result in a larger loss of aid. This might be the case for a student receiving a subsidized loan, for example.
For families looking at this situation, the key piece is whether they’re receiving need-based aid or on a need-based aid path for subsequent students. If the student is receiving need-based aid, it’s worth a conversation with the school’s financial aid office to confirm that you are not shooting yourself in the foot if you change your retirement savings contributions to maximize AOTC eligibility. And for those with additional children approaching college age, it’s a good practice to try out some net price calculators at schools of interest to determine the impact.
Worth noting: Although a student attending college for four years will have college expenses in five tax years, the AOTC can only be claimed for four years. Given the FAFSA and Profile using prior-prior year incomes (i.e., the FAFSA families complete for the 2020-2021 school year will use 2018’s income), there are a maximum of two potential years of overlap per child between AOTC and EFC. Families with multiple students will have more such years.