Whether your child is still mastering the skill of cutting paper in a straight line or they’ve already visited some university campuses, you don’t want your divorce to affect your and your co-parent’s efforts to save for their college education and possibly beyond. That requires careful consideration of these assets and keeping the focus on your child’s interests rather than just your own.
There are a lot of ways to save for a child’s education. Parents often use more than one. Here we’ll focus on 529 college savings plans (like the NC 529 Plan here in North Carolina) because their unique features can make them challenging to handle in divorce.
These are a popular means of saving for educational and vocational expenses. Distributions (withdrawals) are not considered taxable income if they’re used for educational or vocational expenses.
One unique aspect of 529 plans is that only one person (typically a parent) can be the owner, and the child is listed as the beneficiary. Generally, however, jointly held assets are used to make deposits (contributions) to the account.
This can make determining the best outcome for these accounts in a divorce tricky – especially if your co-parent is the legal owner of the account. It’s critical to protect those assets – not just because you contributed some of them but because you want to preserve them for your child’s needs. Since your spouse could potentially close the account themselves and keep the money (assuming they were willing to pay the tax penalties), it’s smart to deal with it as early as possible.
Preserving the funds in a 529 plan
There are multiple ways to protect the funds in your child’s college savings plan if you aren’t an owner. The options depend in part on which specific plan you have.
One option is to keep all the money where it is, require that you receive regular statements so you can monitor the account and not allow any distributions or beneficiary change without your written approval. Meanwhile, you can open another 529 with you as the owner. A child can be the beneficiary of more than one of these accounts.
Ultimately, with sound legal guidance as you deal with your 529 plan(s), you can work to protect your financial interests and your child’s future during and after your divorce.