Responsible parents don’t want their divorce to interfere with their children’s educational opportunities. Whenever possible, they work to ensure that they don’t touch any college savings accounts they’ve established for their kids and that they both remain committed to continuing to save for college or whatever occupational training their children may eventually decide to pursue.
Many parents open 529 college savings accounts (like NJBEST here in New Jersey) because of their tax advantages. Contributions (deposits) are typically tax deductible, while distributions (withdrawals) are not considered taxable income if they’re used for educational or vocational expenses.
One unique aspect of 529 accounts is that they can only have one owner (for example, just one parent), while the child is considered the beneficiary. However, typically, both parents make contributions to a child’s 529 account – either separately or from one of their jointly owned accounts.
This can present complications in a divorce when dividing assets – especially if the parent who owns the account decides to withdraw from or even close it and use the funds for themselves (despite the fact that they’ll pay a tax penalty for it). They could also conceivably keep the account open and use it for another child they have outside their current marriage, for a stepchild or even for a new spouse by changing the beneficiary.
Preserving the funds in a 529 for the intended beneficiary
For the non-account-owning parent, there is more than one way to protect a child’s college savings. It’s possible to roll over part of the balance in the account to another 529 owned by the other parent without incurring tax penalties, for example.
Parents can also agree to require notification and approval by the parent whose name isn’t on the account if any distributions or beneficiary charges are made and to be able to view the account and/or get copies of all statements and communications. The other parent can, of course, open a 529 account for the same child if they choose whether they use rolled-over funds or not.
A 529 account can be too easily overlooked in the midst of divorce and the division of assets that may be worth more or that have to be addressed immediately, like the home. With experienced legal guidance, parents can help ensure that they protect their children’s future regardless.