We are continuing our discussion of 529 plan accounts. As we mentioned in our last post, the plans are useful tools to help parents build up savings for their children's educations. They work a little like individual retirement plans in that the owner builds up the balance over time, often through payroll deduction; any funds withdrawn to cover educational expenses are exempt from federal tax.
Like retirement plans, too, the accounts are marital assets that a couple must consider during a divorce. The money may be earmarked for the children, but the account owner can withdraw the funds, pay a tax penalty, and buy whatever they want with the money left over. They can also use the money to pay for college for a child from another relationship.
Freezing the account will keep the funds in place, allowing the account balance to grow but preventing either spouse from using the money for something other than their child's education. The account must still be maintained, though, so the couple must decide who will have control over investment decisions. The good news is that it need not be a spouse: The couple could agree to hand the job over to a financial adviser.
The couple is not done with negotiations, though. It may seem unlikely, but there may be money left over when the child is done with college. The couple should think about what to do with the remaining funds and include that decision in the settlement agreement.
For example, the remaining funds could be used for another child's education or put toward a spouse's education. The important thing is that the couple consider all the contingencies when working out the property division agreement.
Some of the negotiation can be done away with if the couple decides to split the account. We will discuss that in more detail inour next post.
Source: U.S. News & World Report, "Discuss College Savings During Divorce Process," Reyna Gobel, April 29, 2013