The 411 on 529 Plans

Q: My ex and I are nearing the finish line on our divorce and are in agreement on just about everything, except for how to handle our son’s 529 plan. I want to know what I’m talking about when we discuss this again—can you give me the high points?

A: First, congrats on nearing the finish line! (I know first hand how good that feels!)—and good for you for planning for your son’s higher education. In a nutshell, a 529 plan is a state or state agency-sponsored investment account that allows you to save for your children’s qualified education-related expenses completely tax-free. (note: tax benefits vary by state.) 

You and your spouse were forward-thinking in creating a 529 plan account, and now it makes a lot of sense to consider even further down the road.

Account owner and beneficiary are two different animals Some parents mistakenly believe that a 529 plan account is the property of their child, but it’s actually the account owner, not the beneficiary, who has control of the account. That means an ex-spouse who owns the 529 can legally take distributions for non-qualified expenses and deplete your child’s college fund. 

Include the 529 plan account in the divorce decree There are many things to take into account when deciding how the account should be handled, including who will continue to contribute, how funds may be used by either parent, whether stepchildren can benefit, and how both parents are notified of any distributions.

Decide what’s going to happen to the account if things change What happens to leftover funds after the child finishes college, or if she/he decides not to go at all? Also, outline what happens if the child turns 30 and there are funds remaining: do you cash out, pay penalties on the account earnings, or distribute money to the kids?

529 plan accounts can be tricky, which is why writing specific instructions into a divorce decree can save a lot of headaches. Take a look at your children’s accounts. Find out the balance, which parent is the account owner, and who makes the contributions. Then make notes about what you want to see happen in your and your children’s perfect world. If you need advice, we’re here to help!