Strategies to Safeguard 529 Education Saving Plans in Divorce
In Divorce, Questions Arise About the Ownership and Control of a 529 College Savings Plan Intended to Fund a Child’s Education. Find the Answers Here.
For many parents, their child attending college is a dream come true, and for some, it’s a requirement. In either case, they often want to provide some or all of the funds required for their child to attain this goal. One of the most popular ways to accomplish this is with a 529 college savings plan. But what happens to this plan if the parents divorce before the child is old enough to use the money? Who does the money belong to while the child is under 18? Who retains control over the account, and what prevents them from using money contributed by the other spouse for reasons other than funding college?
Harnessing the Power of a 529 Plan for Diverse Educational Goals
A 529 savings plan is specifically a college savings plan. It is a plan that offers tax advantages for making contributions to the plan and then using the money in the plan for educational purposes. Most people use it as a college savings plan for their children, but it can also be used for the account holder or for education, such as private school tuition.
Navigating the Advantages of a 529 Savings Plan
A few of the advantages of a 529 college savings plan include that the funds contributed to a 529 account are not subject to federal taxes or state taxes in most states. If the named beneficiary does not attend college, most plans allow you to change the name of the beneficiary to a sibling or child of the beneficiary. The funds in a 529 plan can be used at any eligible school in the United States or foreign countries and will not affect the beneficiary’s eligibility for financial aid. Finally, the funds can be used for many college expenses beyond tuition, including fees, room and board costs, required supplies, apprenticeship programs, and repaying student loans.
Breaking Down the Functionality of New Jersey’s 529 Plan
In New Jersey, a 529 plan works through one individual, the account holder, opening the account. Upon opening the account, they name a beneficiary, usually their child, and begin making contributions. There are different types of 529 plans that have different limits on how much money can be contributed per year and whether people other than the account holder can make contributions.
If the 529 plan is a Custodial 529 plan, the plan is designed for a specific child, and contributions are an irrevocable gift to the child. These plans cannot be transferred to another person if the child named does not want to use the funds for college.
Adapting a 529 Savings Plan to Alternative Paths in Education and Careers
The intended purpose of a 529 account is to pay for a child’s college education. However, not every child opts to attend college. They may choose to go to trade school or pursue a career that does not require any further education beyond high school. In these instances, parents may worry that the money contributed to the 529 account is wasted.
For most 529 plans, if the named beneficiary decides they do not wish to use the funds for their education, they can still withdraw the money and use it for other purposes. In doing so, however, they will be required to pay the appropriate amount of federal and state tax on the withdrawal. They will also be required to pay a tax penalty, typically around 10% of the withdrawal amount.
Three Investment Portfolio Alternatives in NJBEST 529 Plan
New Jersey offers the NJBEST 529 plan, which offers three different investment portfolio options. One option is an age-based portfolio, which changes over time, beginning with very aggressive investments when the beneficiary is very young and gradually shifting to more conservative investments as the beneficiary nears college age. A static portfolio is not programmed to change over time. The account holder chooses their portfolio and this choice remains the same until the account is used to pay for the beneficiary’s education, unless the account holder manually makes a change. Finally, an individual portfolio sometimes called a single-fund option, is made up of a single mutual fund. Like the static option, this will not change over time unless a manual change is made.
Managing Beneficiary Dynamics in 529 Plans
In each type of 529 plan, until the beneficiary is 18 and/or ready to attend college, the account holder is in control of the account. This means that, in a traditional 529 plan, the account holder can change the name of the beneficiary whenever they choose and to whomever they choose, including themselves.
A Coverdell 529 plan still allows the account holder to change the name of the beneficiary but is not considered part of the account holder’s estate and must be paid to the beneficiary within 30 days of their 30th birthday.
A Custodial 529 plan has the strictest restrictions, not allowing the parent to change the name of the beneficiary and giving control of the account over to the beneficiary upon reaching the age of majority.
The different types of accounts and the advantages and limitations of each make it important that parents consider all of their options both before opening an account and when considering a divorce. If you have questions about what may happen to a 529 account in your divorce, you should schedule a consultation with an attorney to discuss your legal options.
Strategies and Considerations for 529 Plans in NJ Divorce Scenarios
There are several ways that 529 plans may be handled during a divorce. A Custodial 529 plan, for example, cannot be touched in a divorce. The beneficiary cannot be changed, and thus, no one else can use the money. While this offers the strictest limitations by not allowing the beneficiary to be changed or contributions to be taken back, it does offer the most protection for the child’s college fund in a divorce.
Other options for dealing with a 529 plan during a divorce include creating two separate 529 plans for each parent to contribute to for the same child or naming who will be in control of the account in the divorce decree. The parent not named on the account can request monthly statements as an interested party to track contributions, withdrawals, and other activity on the account.
In the divorce decree, the parties can also declare that both parents must sign off on withdrawals from the account in the divorce decree and/or state that the account can only be used for college expenses for the child in the divorce decree.
The parents may also choose to freeze the account. This option prevents any further contributions and only allows interest to be collected, but prevents the parents from making withdrawals and only allows the money to be used for the child’s education.
Finally, the account could be liquidated. This would require paying taxes on the withdrawals, including a tax penalty, so parents may wish to discuss this option with an attorney before proceeding to ensure they do not create a bigger tax burden for themselves.
Additionally, parents who are divorcing should consider including in their divorce decree how any leftover funds from the account once the child has completed their college education should be handled. They may want to allow one parent to return to school, roll the money over to an account for a sibling, or leave the money in place for the child to return to school for further advanced education.
Talk to a Skilled Divorce Lawyer for Guidance Regarding Your 529 Plan in Little Falls, NJ
Parents are often able to manage a 529 plan themselves while they are married and there are no disagreements. However, once a couple decides to divorce, they may disagree about how to handle the account or be concerned about what the other parent may do with their access to the account. At The Montanari Law Group, our family law attorneys can often assist parents with deciding how best to deal with the 529 plan based on their circumstances or ensure that the divorce decree includes language to protect the plan.
If you are considering a divorce or have already begun the process and have questions regarding how to handle a 529 college savings plan, reach out to our lawyers today to schedule a free consultation and discuss your legal rights and options by calling (973) 233-4396. We can help with your divorce case anywhere in Passaic County, Hudson County, Essex County, and Bergen County, including in Montvale, Paterson, Caldwell, Kearny, and Ridgewood.