If You Have a High School Junior, You Need to Think About Your Taxes Now

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If You Have a High School Junior, You Need to Think About Your Taxes Now

Tim Witham | November 2, 2025

Key Takeaways 📋

✅ The FAFSA uses your tax return from two years before college starts—junior year is your financial aid "base year"
✅ Large income spikes during junior year (stock options, bonuses, retirement withdrawals) can cost you thousands in aid
✅ Retirement account balances don't count as assets, but withdrawals count as income and are heavily weighted against you
✅ Maxing out retirement contributions during junior year can lower taxable income and improve aid eligibility
✅ Strategic planning during sophomore year can position your family for maximum financial aid

Introduction: The $50,000 Mistake Most Parents Make

Most parents wait until senior year to think about college financial aid. By then, it's too late to fix the biggest mistake that could cost your family tens of thousands of dollars in lost aid.
Here's the critical insight most families miss: when your child is a junior in high school, that year's tax return becomes your financial aid base year. Every dollar of income you report, every investment decision you make, and every retirement account withdrawal you take during that calendar year will directly impact how much financial aid your family qualifies for when your student starts college.
In this article, I'll walk you through exactly how the FAFSA timeline works, which financial moves can devastate your aid eligibility, and the proactive strategies you can implement right now to protect your family's college funding.

Understanding the FAFSA Base Year: Why Junior Year Matters Most

The Prior-Prior Year Rule 📊

The Free Application for Federal Student Aid (FAFSA) uses what's called the "prior-prior year" rule for income reporting. This means the FAFSA uses your tax return from two years before your student starts college.

Here's how the timeline breaks down:

- Your child is a high school junior (11th grade) during the 2024-2025 school year
- You file your 2024 tax return in early 2025 (covering January-December 2024 income)
- Your student applies to colleges during senior year (2025-2026)
- You file the 2026-2027 FAFSA in fall 2025 using your 2024 tax information
- Your student starts college in fall 2026

According to Federal Student Aid, this "prior-prior year" system was implemented to allow families to use completed tax returns rather than estimates, making the process more accurate and streamlined. However, this also means your financial decisions during your child's junior year have an outsized impact on aid eligibility.
How the Student Aid Index (SAI) Works

Starting with the 2024-2025 FAFSA, the old "Expected Family Contribution" (EFC) has been replaced by the Student Aid Index (SAI). The SAI uses a complex formula that considers:

- Parent and student income from the base year tax return
- Parent and student assets (with important exceptions)
- Family size and number of household members in college
- Age of the older parent

The SAI can now be negative (as low as -$1,500) to better reflect families with significant financial need. A lower SAI means you qualify for more financial aid—which is why minimizing reportable income during the base year is so critical.

The Cost of Getting This Wrong 💰

With average costs for the 2024-2025 academic year reaching $29,910 for in-state public universities and $62,990 for private nonprofit colleges (according to the College Board), maximizing financial aid eligibility can mean the difference between affordable college and crushing student loan debt.

Even a modest improvement in aid eligibility—say, an additional $5,000 per year in grants and scholarships—adds up to $20,000 over four years. For many mid-career families, that's the equivalent of several months' salary that doesn't have to come out of pocket or be borrowed.

The Retirement Account Trap: What Counts and What Doesn't

The Good News: Retirement Balances Don't Count as Assets ✅

One of the most important protections in the FAFSA formula is this: retirement account balances are not counted as reportable assets. This includes:

- Traditional and Roth 401(k) accounts
- Traditional and Roth IRAs
- 403(b) plans
- SEP-IRAs and SIMPLE IRAs
- Pension plans

This means you can have $500,000 or even $1 million in retirement accounts, and it won't negatively impact your financial aid eligibility. This is fundamentally different from how the FAFSA treats regular brokerage accounts, savings accounts, and 529 college savings plans, which ARE counted as assets.

The Bad News: Withdrawals Show Up as Income and Hurt You Significantly ⚠️

Here's where families get into trouble: while retirement account balances don't count, any withdrawals from these accounts during your base year show up as income and can dramatically reduce your aid eligibility.
According to Saving for College, retirement account distributions are treated as untaxed income and are assessed at some of the highest rates in the financial aid formula. Current FAFSA income assessment rates under the new SAI formula can range from 22% to 47%, depending on your overall financial profile.

Let's look at a real-world example:

Hypothetical Scenario: The Johnsons are mid-career professionals with a high school junior. In 2024, they need $40,000 for a home renovation and decide to withdraw it from their traditional 401(k).

Impact on Financial Aid:

- The $40,000 withdrawal appears on their 2024 tax return as taxable income
- This additional income increases their SAI by approximately $9,000-$18,800 (depending on their income bracket and other factors)
- Their financial aid package could be reduced by roughly $10,000-$19,000 per year
- Over four years of college, this one withdrawal could cost them $40,000-$76,000 in lost financial aid
The irony? That $40,000 withdrawal could ultimately cost them nearly twice that amount in lost aid—turning a seemingly reasonable financial decision into one of the most expensive mistakes they could make.

What About Rollovers?

There is one critical exception: trustee-to-trustee rollovers (moving money from one retirement account to another) do NOT count as taxable income on your tax return and therefore do NOT impact your FAFSA.
If you must access retirement funds during your base year, work with your financial advisor to structure it as a rollover rather than a distribution whenever possible.
Income Timing Strategies: What to Avoid (and Embrace) During Junior Year

Financial Moves That Can Devastate Aid Eligibility 🚫

If your child is currently a sophomore or junior in high school, avoid these income-boosting events during the base year if at all possible:

1. Exercising Stock Options

If you have non-qualified stock options (NQSOs) or restricted stock units (RSUs) vesting, the income from exercising these options will appear on your W-2 and dramatically increase your taxable income. If possible, time these exercises for the year BEFORE your child's sophomore year or AFTER junior year.

2. Taking Large Bonuses

While you may not have complete control over when you receive performance bonuses, if you do have the option to defer compensation, consider deferring large bonuses until after your base year closes.

3. Roth IRA Conversions

Roth conversions are a popular retirement planning strategy, but they create a large taxable income event in the year of conversion. Hold off on conversions during your child's junior year if financial aid is a priority.

4. Realizing Large Capital Gains

Selling appreciated investments—whether stocks, real estate, or business interests—creates capital gains that count as income on your tax return. Delay these sales until after the base year if possible.

5. Taking Distributions from Grandparent-Owned 529 Plans

Under the new FAFSA rules, distributions from grandparent-owned 529 plans paid directly to the college are no longer counted as student income—a significant improvement. However, if you're still operating under old information, this is worth understanding.

Strategic Moves That Can IMPROVE Aid Eligibility ✅

Now for the good news: There are proactive strategies you can use during the base year to minimize your taxable income and improve your aid eligibility.
1. Max Out Retirement Contributions

Increasing your 401(k), 403(b), or IRA contributions during your base year accomplishes two important goals:

- Lowers your taxable income, which reduces your SAI
- Increases your protected retirement assets, which don't count on the FAFSA
For 2024 and 2025, the IRS contribution limits are:
- 401(k)/403(b): $23,000 (2024) and $23,500 (2025)
- Age 50+ catch-up: Additional $7,500
- Age 60-63 catch-up (new for 2025): Additional $11,250
- Traditional and Roth IRAs: $7,000 for both years
- IRA catch-up (age 50+): Additional $1,000

According to the IRS, these limits represent the maximum pre-tax or Roth contributions you can make as an employee.
Hypothetical Scenario: If you're age 52 and increase your 401(k) contribution from $10,000 to the maximum $30,500 ($23,000 base + $7,500 catch-up) during your base year, you reduce your taxable income by $20,500. This could improve your SAI by approximately $4,500-$9,600, potentially increasing your aid eligibility by $5,000-$10,000 per year.

2. Accelerate Deductible Expenses

Consider accelerating tax-deductible expenses into your base year:

- Business expenses (if you're self-employed)
- Charitable contributions
- Medical expenses (if you can exceed the 7.5% AGI threshold)
- State and local taxes (up to the $10,000 SALT cap)

3. Delay Income Recognition

If you have control over income timing:

- Delay invoicing for self-employed income
- Structure consulting fees to be paid after the base year
- Consider deferring year-end bonuses if your employer allows it

4. Maximize Pre-Tax Benefits

Contribute to other pre-tax accounts that reduce your taxable income:

- Health Savings Accounts (HSAs): $4,150 individual/$8,300 family (2024)
- Flexible Spending Accounts (FSAs)
- Dependent Care FSAs: $5,000 (if you have younger children)

Important Changes to FAFSA Rules You Need to Know

The FAFSA underwent significant changes starting with the 2024-2025 award year. Here are the most important updates that affect families with high school juniors:

Major Changes Under FAFSA Simplification 🔄

1. Simplified Application

The FAFSA form now has approximately 36 questions instead of the previous 108, making it significantly easier to complete.

2. Mandatory IRS Data Direct Exchange

You can no longer manually enter tax information. The FAFSA now pulls data directly from the IRS through the IRS Data Retrieval Tool, which reduces errors and speeds up processing.

3. Small Business and Family Farm Assets Now Count

Previously, small business and family farm assets were excluded. Under the new rules, these assets are now reportable, which can significantly impact aid eligibility for business owners and farmers.

4. Sibling Discount Eliminated at Federal Level

The old FAFSA formula gave families a break when multiple children were in college simultaneously. This benefit has been eliminated for federal aid (though some private colleges using the CSS Profile still consider it).

5. Divorced/Separated Parent Rule Changed

The new rule requires the parent who provides the most financial support during the prior calendar year to complete the FAFSA, regardless of custody arrangements.

6. Retirement Contributions No Longer Added Back

Previously, contributions to retirement accounts during the base year were added back as income. This is no longer the case, making maximizing retirement contributions even more beneficial.

Professional Judgment Reviews for Changed Circumstances

If your family experiences a significant income decrease after the base year (job loss, disability, business closure), you can appeal to the college's financial aid office for a Professional Judgment Review. While not automatic, this allows schools to adjust your aid package based on current circumstances rather than outdated tax information.

Creating Your College Planning Timeline: What to Do Now

Here's a practical action plan based on your child's current grade level:

If Your Child is a Sophomore (10th Grade) 📅

NOW - Spring of Sophomore Year:

- Meet with a financial advisor who specializes in college planning
- Review your expected income for the upcoming calendar year (your child's junior year)
- Identify any large income events (stock options, bonuses, Roth conversions) that could be timed differently
- Develop a comprehensive income timing strategy

Summer Before Junior Year:

- Maximize 401(k) and IRA contributions if possible
- Consider accelerating deductible expenses
- Avoid large retirement account withdrawals

If Your Child is a Junior (11th Grade) ⚡

RIGHT NOW - Immediate Actions:

- Calculate how much you can afford to increase retirement contributions for the remainder of this calendar year
- Review any planned financial decisions (home purchases, investment sales, job changes) and assess their impact on the FAFSA
- If you must access funds, explore alternatives to retirement account withdrawals (home equity line of credit, taxable investment accounts)
- Postpone any non-essential large income events until next calendar year

This Summer/Fall:

- Continue maximizing retirement contributions through year-end
- Document your family's financial information for the upcoming FAFSA
- Research colleges with strong financial aid programs

If Your Child is a Senior (12th Grade) 📝
Fall of Senior Year:

- Complete the FAFSA as soon as it opens (October 1st)
- File the CSS Profile if required by any schools on your list
- Apply for private scholarships

If Your Base Year Income Was Higher Than Typical:

- Prepare documentation explaining unusual circumstances
- Request Professional Judgment Reviews from financial aid offices at schools that accept your student
- Provide context for any one-time income spikes

The Bottom Line: Planning Now Protects Your Family's Future 🎯

College planning isn't just about where your child applies—it's about strategically positioning your family's finances to maximize aid eligibility while protecting your retirement and long-term financial security.
The decisions you make during your child's junior year of high school will echo through four years of college expenses. A single large income event can cost your family tens of thousands of dollars in lost financial aid, while strategic income timing and retirement contribution planning can significantly improve your aid package.

Here's what I want you to remember:

1. Junior year is your financial aid base year—every income decision matters
2. Retirement account balances don't count, but withdrawals hurt you significantly
3. Maxing out retirement contributions lowers taxable income and improves aid eligibility
4. Timing is everything—plan large income events for before sophomore year or after junior year
5. The new FAFSA rules have both helped and hurt families; understanding them is critical
The moves you make right now determine how much aid your family qualifies for and ultimately how much college will cost you out of pocket.

Take Action: Schedule Your College Planning Consultation

Navigating college planning and taxes together requires specialized expertise that goes beyond traditional financial planning.
If your child is currently in 10th or 11th grade, now is the time to develop a comprehensive income timing strategy that protects your financial aid eligibility while keeping your retirement and other financial goals on track.

Ready to create your family's college funding strategy?

Schedule a consultation with me to:

- Analyze your specific situation and income timeline
- Identify opportunities to improve your aid eligibility
- Develop a tax-efficient college funding plan
- Coordinate college planning with your broader financial goals

Contact Balanced Life Planning today to schedule your personalized college planning consultation

About the Author

Tim Witham, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional and founder of Balanced Life Planning. With over 14 years of experience, Tim specializes in helping mid-career professionals navigate the complex intersection of college planning, tax strategy, and retirement preparation. He is particularly passionate about working with families who are facing college decisions while managing expanding incomes and competing financial priorities.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization's initial and ongoing certification requirements to use the certification marks.

Sources & References

1. [Federal Student Aid - Filling Out the FAFSA](https://studentaid.gov/apply-for-aid/fafsa/filling-out)

2. [Saving for College - How 7 Different Assets Can Affect Your Financial Aid Eligibility](https://www.savingforcollege.com/article/how-7-different-assets-can-affect-your-financial-aid-eligibility)

3. [College Board - Trends in College Pricing Highlights](https://research.collegeboard.org/trends/college-pricing/highlights)

4. [IRS - 401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000](https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000)

5. [Federal Student Aid - How Financial Aid Is Calculated](https://studentaid.gov/complete-aid-process/how-calculated)

6. [FSA Handbook 2024-2025 - Student Aid Index (SAI) and Pell Grant Eligibility](https://fsapartners.ed.gov/knowledge-center/fsa-handbook/2024-2025/application-and-verification-guide/ch3-student-aid-index-sai-and-pell-grant-eligibility)

7. [Frisch Financial Group - FAFSA Rules for 2025-2026](https://frischfinancial.com/fafsa-rules-for-2025-2026/)

8. [Bankrate - Average Cost Of College 2024-2025](https://www.bankrate.com/loans/student-loans/average-cost-of-college/)

9. [IRS - COLA increases for dollar limitations on benefits and contributions](https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions)

Compliance Disclosure

DISCLOSURE: The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed accuracy. Balanced Life Planning is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only, are subject to change from time to time and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.