When it comes to dividing divorce assets, the question arises of who gets the college savings plan. Parents should not overlook designated education savings when dividing marital assets. These assets should be carefully considered to avoid putting your children’s education at risk. Having a plan for dividing these assets can help reduce the financial disruption associated with divorce.
Know Where College-Related Divorce Assets Are
It is important for both parties in the divorce to be clear about the whereabouts of college savings assets. These assets may include:
- 529 Plans
- Coverdell Education Savings Accounts
- Savings Bonds
- Custodial Accounts for Minors (UGMA/UTMA)
When reviewing where your education savings accounts are, you should take note of the following details:
- Account balance
- Listed beneficiaries and account holders
- Date of asset accumulation and who was responsible for contributions
If both of you have contributed to the accounts, you may also want to calculate how much each of you added to the plan or plans.
Determining the Division Plan
Once you have identified the assets that fall under college savings, you can proceed to discuss how to divide them. The simplest way may be to split all college savings accounts evenly, but you may prefer to keep the assets in one joint account. For example, you might continue to control your child’s 529 Plan, while your ex-spouse controls their Coverdell education savings accounts or custodial accounts for minors.
During the process of dividing these assets, you may want to ask the court to prevent any withdrawals from the college savings account until the divorce is finalized. This can help protect your child’s education fund until you and your spouse can agree on how to fairly divide the assets.
Determining How College Savings Assets Can Be Used
If you both agree on how to share the college savings accounts, you may have overcome the biggest hurdle. Your divorce decree should specify exactly how these assets can be used by either parent.
The Internal Revenue Service (IRS) has specific guidelines on what the funds from a 529 Plan and Coverdell Education Savings Account can be used for. A 529 Plan is designed to pay for qualified higher education expenses, including tuition, fees, books, room, and board. The Coverdell Education Savings Account can be used for both qualified higher education expenses and qualified primary and secondary education expenses. Withdrawing funds for anything other than qualified education expenses may result in tax penalties.
Although the rules clearly outline how these accounts can be used, there is no way to prevent the account holder from withdrawing funds for purposes other than higher education (provided no penalties are incurred). If you are concerned that your ex-spouse is using your child’s education funds for personal purposes, you may want to include language in your divorce decree specifying that you must both agree before any withdrawals.
You can also ask the court to provide account statements if you are no longer the account holder for the 529 Plan or other college savings account. This way, you can monitor what is withdrawn from the account and what is deposited into it.
Planning for Future Contributions to College Savings
The final piece of the puzzle when dealing with college assets in divorce is determining how to contribute to future savings plans. For example, if you are splitting the 529 account evenly, will each of you contribute the same amount monthly or annually? Or will each of you contribute a specific amount based on what your income allows?
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You may also want to discuss how to handle contributions from other people besides you two. For instance, if your parents are contributing money to different college accounts on behalf of your child, will they continue to do so? Or will their contribution be limited to just one account after the divorce? It may not be necessary to include this explicitly in your divorce decree, but it’s good to have this discussion early on instead so that everyone has clear expectations.
Don’t Forget About Additional Beneficiaries
Another thing you may want to discuss is what will happen to any college savings funds that your child does not use. With a 529 plan, you can transfer the account to a new beneficiary as much as you need, as long as the new beneficiary is a qualified relative. Coverdell accounts can also be transferred to new beneficiaries. If you have only one child, you may want to determine who any unused college savings plans will go to if there are leftover funds.
Frequently Asked Questions
How do divorced parents divide college expenses?
The way college fees for your child are covered after the parents’ divorce depends on state law. Some states may not allow college fees and university expenses to be part of the divorce decree. Ultimately, both parents may need to agree during the divorce proceedings on how to cover college fees and other university costs and who will bear them.
Can a parent withdraw money from a 529 account?
A parent can withdraw money from a 529 account, whether for qualified educational expenses or non-qualified expenses. However, the parent must pay a 10% penalty on the withdrawn funds used for non-qualified expenses, in addition to income tax on any earnings.
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Sources:
- Internal Revenue Service (IRS). “Publication 970, Tax Benefits for Education.”
- FindLaw. “Child Support and College Expense FAQs.”
Source: https://www.thebalancemoney.com/dividing-divorce-assets-who-gets-the-college-savings-plan-4165812
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