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How are college savings plans dealt with in divorce?

by | Apr 4, 2023 | Family Law


There’s a lot to take into account as you navigate your divorce. Child custody, child support, and alimony can be key components of your marriage dissolution, but property division almost always plays a central role, and for good reason.

The ultimate resolution to your property division dispute can have tremendous ramifications for your financial stability post-divorce, and for years to come.

Although a lot of the focus during this property division process is on bank and retirement accounts as well as personal property, there are some assets that are oftentimes overlooked or misunderstood. If you don’t get a handle on these assets, then you could be missing out on an opportunity to secure the resources that you need and deserve.

College savings accounts

One type of asset that tends to be overlooked and misunderstood is a college savings account. These plans, often referred to as 529 plans, provide you with tax savings as you put money aside for your child’s college education. If you put money into this account and use it for your child’s education, then you won’t have to pay federal taxes on it.

Given that these accounts can grow significantly over time, they can pose a unique challenge in the midst of a divorce. Contrary to popular perceptions, the money placed into one of these accounts doesn’t belong to the child. Instead, the individual who invested the money will own the account.

In fact, the money that’s placed into a 529 plan doesn’t even have to be used for the child’s educational expenses. Money can be withdrawn from the account to be used for any purpose, although non-educational use will subject the account owner to tax penalties.

So, how is a 529 going to be dealt with in your divorce?

That really depends on the circumstances and what you want out of the process. What’s important to remember is that given the unique nature of a 529 plan, you and your spouse should be diligent in deciding what to do with it. If you and your spouse can trust each other, then there may be no need to split the 529 given that there’s an understanding that the account holder will continue to contribute to it and will use the funds to further your child’s education.

If, on the other hand, you’re worried that the funds within the 529 will just be withdrawn for personal use, thereby putting your child at a financial disadvantage, then you might want to consider alternative options. This may include placing specific terms in your divorce settlement that address how contributions to the account will occur and how the funds will be used. Or maybe you just want to withdraw all of the money from the account, take the tax penalty, and divide the money between you and your spouse.

You have to find the resolution that’s right for you and your child’s future. If you and your spouse can’t agree on that, then the matter will have to be decided in front of a judge who may have their own idea of what college savings should look like.