When parents divorce and begin dividing their assets, it’s crucial to give special consideration to savings set aside specifically for their children’s college education. No parent wants the end of their marriage to derail their child’s chance for the best education they can help provide for them.
Whether this savings is in the form of an investment or savings account, savings bonds or a prepaid tuition plan, you want to make sure that it remains safe and able to grow until your child needs it. That’s important whether college is many years off or around the corner.
What if you have a 529 college savings plan?
Many parents use tax-advantaged 529 plans to build up college savings. They carry a number of tax advantages. Contributions may be tax deductible, depending on your income. Further, distributions aren’t taxed if they’re used for qualified educational expenses.
The reason 529 plans can be tricky in divorce is that unlike most types of accounts, they can only have one owner. That means if you have a 529 plan, it legally belongs to whichever one of you is the owner. Your child is the beneficiary.
The parent who owns the account could potentially close it and take the money (although they’ll pay a tax penalty). They could also eventually use it for another child they might have later rather than for your child.
How can you protect the funds?
It’s smart to put an agreement in place as part of your divorce or ahead of it to help protect the funds in the account from misuse. Even if you’re the one who owns the account, it can help show good faith and commitment to your child’s educational goals.
Many parents designate that no withdrawals or beneficiary changes be made without the other parent’s written consent. It’s wise to arrange for both parents to have access to the account so they can review it at any time.
If your 529 plan involves investments, you may both want to have a say in how the investment choices are made. You can also agree to each contribute a specified amount on a regular basis.
These are just a few considerations. Having sound legal guidance can help you protect these funds and your child’s future.