Parents have 4 primary options to accumulate college savings. This post will discuss one of those options ("529" accounts) and what to expect from the 529 accounts if the parties divorce. Please consult your financial advisor and your attorney before opening, closing or modifying any college savings account. Financial account parameters can, and often do, change over time.
529 college savings plans
These tax-advantaged accounts are designed to pay for qualified higher education expenses. They can be used for a student of any age. They also have a relatively "low impact" on financial aid.
ECONOMIC DIMENSIONS
A. Tax Advantages: Any earnings grow tax-deferred. Also, qualified 529 account distributions are tax free.
There are also gift and estate tax benefits. Up to $70,000 may usually be contributed without gift tax implications. Also, the 529 contributions are usually not made a part of a deceased owners estate.
B. Contribution Details: Most 529 plans have a high maximum contribution of 200K or more. Contributions are not limited by the income of the account owner. Best of all, they are considered to be owned by the parents (and not the child) and so often have a lower weighting in many financial aid formulas. 529 accounts generally require withdrawal for educational purposes (tuition, books etc.). However, withdrawals may be made for any purpose upon payment of taxes on the distribution and a 10% penalty.
C. Account Managementt: The account owner may transfer the account to another member of the original beneficiaries family. The contributions are considered "revocable gifts" to the child and the owner controls the account (with the child as beneficiary). There are a variety of portfolio and investment options for 529 accounts.
DIVORCE DIMENSIONS
The divorce court has jurisdiction over 529 accounts since they belong to the owner(s) getting divorced. So, 529 accounts can be marital property and divided by the divorce court via equitable distribution.
However, most divorcing parents will agree to preserve them for the benefit of their children. The oversight and other details of a 529 account may be made a part of the parties' marriage settlement agreement. If the 529 account is preserved for the children, it typically has little or no effect on the divorce settlement.
Sometimes the post-divorce 529 account will be supervised by only one parent, but it is more common for the 529 account to be supervised by both parties.
