A 529 plan is an investment account that parents often open to save for a child’s education. The tax benefits of a 529 plan are also significant when they’re used properly, which is why they’re a common asset for affluent parents with children.
However, in a divorce, a 529 plan sometimes is forgotten when the focus is on child custody, issues of support and the property division process. It’s important not to ignore this plan.
Here are some things that should be considered
A 529 plan only has one owner. The owner has full control over the plan, including the ability to change beneficiaries in the future or even withdraw funds for non-educational purposes (although that does trigger taxes and penalties).
To protect your child’s future educational path, you need to address the following:
- Future ownership: If custody of the child is not shared equally, it may be best for the parent with primary custody ownership of the account. Joint ownership is not an option, so divorcing couples have to decide who will retain control.
- Future contributions: Will both parents continue to make contributions to the account? If so, how much and how often? If only one parent contributes, will the other parent match the contributions through another means so that the college burden is shared?
- Future changes or withdrawals: Imagine that your spouse retains ownership of the 529 plan after the divorce and remarries and has another child. They could, legally, change the beneficiary designation from your child to their new child – unless you have a court order stopping them from doing so. Similarly, a court order might be required to stop them from making withdrawals for personal needs down the line.
Don’t let your divorce derail your child’s education. Addressing these issues with an existing 529 plan today can help avoid a lot of disappointment and financial struggles for your child in the future.