Can You Split a 529 Plan In a Divorce?

By Amanda Singer

When you have children, one of the things people start early, sometimes even when they’re babies, and college is a long way off, is a 529 plan.  For those of you who may not know, a 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary.  You can use a 529 plan to pay for college or even K-12 private school tuition, if necessary, but most people use it as a college savings plan, and if you have children and a financial advisor, they should have talked to you about it. The cost of college is only getting more and more expensive, and planning is the best way to ensure that you have the funds to help pay for college costs if that’s something you are able and want to do. Many of the clients we work with have already started 529 Plans for their child(ren), and this is often a topic of discussion as we look at the assets that need to be divided in the divorce.

How a 529 Plan Is Split In a Divorce

A 529 plan can only be used with the tax benefits if it’s for a qualified education expense. Hence, most of the time, when we’re in mediation, the parties decide that they’re going to separate the 529 plan from the rest of the assets as an asset of the child and not touch it as part of the divorce. However, sometimes we run into parents who don’t want to continue contributing jointly to the account, or maybe only one of the parents or their family has ever contributed to the account. Although the account is a savings plan for the child, it is still in the name of one of the parents (more on that later). If contributed during the marriage in California, it would be considered community property and subject to division in a divorce. Most of the time, it makes more sense to keep it in one account and continue having that money grow for the minor child(ren) to use for college and other qualified education expenses and discuss how to manage that account and what it will be used for as part of the settlement agreement. However, if you don’t want to have any joint assets with your spouse moving forward, there are options. If the parents choose, they can split the 529 plan into two accounts, and then each manages the plans themselves.  If this happens, it will be necessary to open another account and divide the funds in the current account. This can be done and the funds divided, but you want to make sure that you’re not taking the money out as a withdrawal, or you could get taxed and penalized on that money.

How We Handle It

One of the things about a 529 plan that I have always found crazy is it can only be in the name of one parent, and then the child is the beneficiary.  This means that when parents are divorcing, there is no way for that account to be in both parent’s names and is something to discuss during the divorce as it may make more sense to have the account in one parent’s name versus the other. Usually, this may be whoever the custodial parent is, but there may be different reasons for that. It’s important to discuss and for the non-account holder parent to have access to the account information if the account is staying joint and for that to be written into the marital settlement agreement. Hence, there are no questions or issues in the future.

Would you like assistance in splitting assets, including a 529 plan, in your divorce? Contact West Coast Family Mediation Center at (858) 736-2411 today!

Leave a Reply

Your email address will not be published. Required fields are marked *