When parents divorce, it can impact many facets of the family’s life. One often overlooked aspect is the fate of a child’s 529 college savings plan. These educational funds, meticulously built to secure a brighter future, can become a source of confusion and contention during a divorce. A variety of questions may naturally arise, such as: How do divorce and 529 plans affect one another? Can one parent take sole control of the 529 plan? What happens to the contributions made during the marriage? By addressing these concerns, parents can ensure that their children’s educational aspirations remain steadfastly supported, even in divorce.
What Are 529 Plans?
529 plans are specialized tax-advantaged investment accounts specifically designed to facilitate saving for future educational expenses. Named after Section 529 of the Internal Revenue Code, these plans offer families a strategic financial vehicle to fund their children’s higher education aspirations.
The primary purpose of a 529 plan is to provide a dedicated savings platform, allowing parents, guardians, extended family members, and even friends to contribute towards a beneficiary’s educational fund. These contributions have the potential to grow over time, thanks to the various investment options typically offered within these plans. Also, when funds are withdrawn for qualified education expenses, such as tuition, fees, books, educational supplies, and specific room and board costs, they are not subject to federal income tax.
529 plans offer flexibility regarding contribution amounts, investment options, and the ability to rollover funds between 529 plans. The account holder, typically a parent or legal guardian, manages the account. They retain control over the funds and can decide when and how to use them for their child’s education.
Who Gets Credit?
During a divorce, the ownership of a 529 plan can become a critical point of consideration. In many cases, parents have the flexibility to modify the ownership of a 529 plan. Sometimes, the parent who made the most contributions to the 529 plan may seek full ownership, as they believe their more significant financial investment should be recognized and afford them more control over the funds. In other situations, divorcing couples may decide that the parent who provides less financial support should become the account owner. This could be to ensure both parents remain involved or to benefit from the tax advantages of the 529 plan.
Regarding beneficiaries, it’s essential to recognize that not all 529 plans operate under the same rules. Custodial 529 plans, established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), have specific limitations. In these instances, the Custodial 529 plan cannot be targeted during a divorce, and the beneficiary cannot be changed, as these plans are considered the beneficiary’s property. While this aspect reinforces the protective nature of these accounts and ensures that they are preserved for the intended educational purpose, it does not directly impact the modification of ownership.
How Does New Jersey Divorce Affect 529 College Savings Plans?
In New Jersey, 529 plans in divorce are considered marital assets. This means they are subject to equitable distribution, a legal principle that seeks to divide assets fairly (not necessarily equally) between divorcing spouses. As such, the funds held within a 529 plan are part of the overall financial picture that the court will consider when determining asset division.
The court will take into account factors such as who established the plan, who contributed to it, the intended purpose of the funds, and the educational needs of the child. Additionally, any agreements or arrangements made between the divorcing parties regarding the 529 plan will be considered. While the child’s best interests are typically a primary focus, the court’s goal is to devise an allocation that respects the financial commitments made during the marriage.
Can My Ex-Spouse Spend My Child’s 529 Plan Money?
Making sure that funds from a 529 plan are used for their intended purpose—financing higher education for children—is sometimes a concern for parents going through a divorce. It’s important to note that 529 plans are subject to specific rules and regulations governing withdrawals. To maintain their tax-advantaged status, funds must be used for qualified educational expenses. If funds are withdrawn for non-qualified expenses, they may be subject to federal income tax and a 10% penalty on earnings. Of course, this also means that it is indeed possible for funds to be misused by an ex-spouse, given that they are the account owner.
Protecting Your Child’s Educational Funding
College savings and divorce interact in complex ways, and it’s common for parents to feel uneasy about the fate of their children’s education funds. To ensure that 529 plan funds are used exclusively for their intended purposes, it’s advisable to establish clear communication and agreements with your ex-spouse. This may involve outlining the specific use of the funds in the divorce decree or creating a separate agreement addressing the 529 plan.
Establishing a system of accountability, such as regular check-ins, may also be beneficial, as this can provide a layer of protection and encourage both parents to stay actively engaged in the funding process. During these check-ins, parents can take stock of their progress towards their child’s savings goals, as well as address any changes in their financial situations that warrant adjustments to their contributions. If there are any uncertainties or disputes about using 529 plan funds, consulting a New Jersey family lawyer with expertise in educational savings can provide clarity and valuable guidance.
Contact the Dedicated Attorneys at the Zeigler Law Group, LLC
Dealing with a divorce and its impact on 529 plans can be complicated and draining for ex-spouses, but the educational aspirations of your child remain a shared responsibility. To ensure that your child’s college savings are protected and they receive the opportunities they deserve, consider working with the experienced divorce attorneys at the Zeigler Law Group, LLC. We can help you distill and navigate concerns from tax implications to potential disputes, offering the personalized advice you need. Call us today at 732-361-4827 to set up a free consultation. We serve clients throughout New Jersey.