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529 plan college savings can be saved in property division

It is hard to say when college got so outrageously expensive. Lake County residents have a number of close-to-home options for undergraduate degrees, but even living at home and taking public transportation to school cannot fully mitigate the basic cost of that bachelor's degree. 

For the past few years, more and more parents have been saving for their kids' college education by putting money into 529 plans. The plans work a little like individual retirement plans: The owner establishes the account and regularly deposits money, often through payroll deduction. Over time, the fund grows, and when college rolls around the owner can withdraw the money to pay for tuition or other education expenses. The advantage is that the withdrawn funds are not subject to federal tax if they are used for education.

When parents divorce, they need to figure out what they will do with the 529 plan account. The account is an asset, just as an IRA is, so the couple needs to consider it when working on their property division settlement.

One option, of course, is to cash out the account and split the proceeds in some equitable fashion. Cashing out, of course, will mean paying the tax penalty, which also will be split equitably.

Another idea is to freeze the account. Financial advisers recommend this as a first step, in fact, when it becomes clear that the marriage is over. Freezing the account means that no one can make any more contributions, but neither can anyone withdraw funds. The money is there, still earmarked for the child's or children's education.

Freezing the 529 plan account, however, does not mean that there aren't decisions left to be made. We'll get into that more in our next post.

Source: U.S. News & World Report, "Discuss College Savings During Divorce Process," Reyna Gobel, April 29, 2013

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