When couples are dividing assets during divorce, it can be understandable that the 529 college savings plan they started for their child wouldn’t be their greatest concern. That’s particularly true if their child is still many years away from college and the plan doesn’t yet have a hefty balance.
Nonetheless, if you have one of these tax-advantaged plans, it’s important to understand a bit about how they work and how you can help ensure that your savings for your child’s future doesn’t go off-track during your divorce.
Since 529 plans can only have one owner, either your or your spouse’s name is listed as the owner, with your child named as the beneficiary. If you were to close the account and split the assets, you’d likely end up being taxed on them since distributions (withdrawals) are only tax exempt if they’re used for “qualified education expenses,” like tuition, room and board and school supplies and equipment.
Maintaining control over the assets if you’re not the owner
If the balance in the plan is significant, you might choose to keep it as-is, but codify an agreement where the non-owning parent must consent to any distributions or changes in beneficiary and have access to all statements.
This can prevent the parent who owns the account from withdrawing the money for themselves or changing the beneficiary to a stepchild. If you’re the other parent, this can help you keep an eye on the plan to which you may have contributed some of your income and other individual assets.
Every situation is unique. Certainly, determining what to do with a plan with hundreds of thousands of dollars in it is going to require more time and consideration than one with just a few thousand dollars in it. It’s wise to consult with your own financial and tax professional professionals in addition to having experienced legal guidance.