With the cost of college constantly increasing, many parents start saving for their child’s education as soon as they’re born. There are a lot of options to choose from.
Many parents include 529 college savings accounts in their college planning because they have numerous tax advantages. For example, contributions (deposits) are typically tax-deductible. Further, distributions (withdrawals) aren’t taxed as income as long as they’re used for educational expenses. This can include vocational, trade and technical school expenses.
What happens to these accounts when parents divorce? To understand how to protect your child’s college savings, it’s important to understand some of their unique characteristics. For example, an account can only have one owner. The child is the beneficiary. That means the account legally belongs to only one spouse, but that does not mean the account may not be considered in the divorce.
What can the parent who owns the account potentially do with it?
That spouse could conceivably close the account and use the funds in it for whatever they want, if they don’t mind paying the tax penalties. They can also keep it open and continue saving for their child’s education.
Because parents are allowed to change the beneficiary on the account (for example, to another one of their children), the account owner could potentially change the beneficiary later if they have another child with a new spouse or if they want to use it for their new spouse’s own educational expenses.
Options for a 529 account as parents divorce
Divorcing spouses who agree that they want to continue saving for their child’s education can roll part of the balance over to an account owned by the other spouse and avoid tax penalties. Parents can also help ensure that the owner of the 529 account doesn’t make any unapproved changes by putting an agreement in place that requires their approval for any distributions or beneficiary changes. They can also get a copy of the account statements when they’re issued to watch over things.
A 529 account is often just one of a number of ways that parents save for their children’s future. That’s why it’s smart to address that overall commitment to saving in the divorce agreement.
No responsible parents want their children’s educational or vocational opportunities to suffer because they’re no longer together. With experienced legal guidance, parents can help ensure that they’re able to maximize their child’s access to educational opportunities.