December 14, 2020
One of the most popular forms of saving for college is the 529 Plan. Named after its section of the IRS code, the plan is a way for parents to squirrel away money for their children’s educations on a tax-deferred basis. If the money is spent on a qualified college education expense, then withdrawals are tax-free (if withdrawn for any other purpose the owner is subject to income tax and a 6% penalty). These accounts have become even more popular in the past few years, since the 2018 Tax Cuts and Jobs Act extended the definition of a “qualified educational expense” to include $10,000 per year of tuition for grades K-12.
The structure of the account requires a parent or other adult to be the owner of the account while the student is the beneficiary. The owner has control over how the account is invested and is the only person who can request a distribution.
At first glance you might not consider this type of account to be a marital asset or in need of being part of the divorce discussion. It is typical to hear that this money “belongs to the kids” and, mentally, is separated from the assets that belong to the divorcing spouses. Although technically the account belongs to the parent-owner, it may be true in many cases that there is no need to talk about who should be the owner or how the account is to be used. As long as both parties are in agreement on how the 529 plan money will be spent (that it will be used only for a qualifying expense) and trust each other to administer the account for its intended purposes, then it could simplify matters to leave it out of discussion.
But, if there is concern that the parent-owner may not be a good guardian of the college money then some protectionary measures may be considered.
These measures can help prevent a parent from withdrawing money for a use other than the child’s education, and in the long run help preserve a healthy relationship between spouses.
