Going through a divorce is never easy, especially when there are children involved. Some parents mistakenly believe that a 529 plan account they set up for their child is the property of the child. But, the 529 plan accountowner, not the beneficiary, actually has control of the account.
Unless the divorce decree states otherwise, an ex-spouse who is the 529 plan account owner can legally take distributions for non-qualified expenses and deplete your child’s college fund. They can also change the beneficiary from your child to their stepchild.
Here are some tips on how you can protect your child’s 529 plan savings in the event of a divorce.
Which parent is the 529 plan account owner?
529 plans are considered assets of the account owner, which is often a parent. The 529 plan account owner may change the beneficiary or take a distribution at any time for any reason, whether or not it is in the best interest of the original beneficiary.
In most cases, parents appreciate this flexibility. For example, if a child decides not to go to college or there are leftover funds in the 529 plan account after they graduate, the parent can change the beneficiary to a sibling or otherqualifying family memberwithout tax consequences.
If a 529 plan is used to pay for anything other thanqualified education expenses, such as tuition, fees, books, supplies and equipment, K-12 tuition or student loan repayments, it is considered a non-qualified distribution. But, only the earnings portion of a non-qualified 529 plan distribution is subject to income tax and a 10% penalty. A 529 plan account owner never pays tax or penalty on the contribution portion of the withdrawal.
Most 529 plans do not allow joint ownership, which means only one parent can be the account owner. In the event of adivorce, one parent could be left with full control over a child’s college savings. The parent who is the account owner could potentially:
- Take a non-qualified distribution to pay for something other than the beneficiary’s education expenses, such as attorney fees, a new car, a big-screen TV, a vacation, groceries or other living expenses
- Get remarried and change the 529 plan beneficiary to a child or stepchild with the new spouse
- Use the 529 plans to further their own education or pay down their own student loans
- Roll the funds into another 529 plan account with themselves as the named beneficiary
How to prevent an ex-spouse from taking your child’s 529 plan funds
Since 529 plans are typically opened for the benefit of a child, they might get overlooked when negotiating a divorce settlement. But, since 529 plan assets technically belong to one of the parents, it is important to include instructions for them in the divorce decree. For example, this may include language stating:
- How the 529 plan funds can be used by either parent
- That the non-account owner parent must be notified before a distribution is taken
- That the 529 plan beneficiary cannot be changed without approval from both parents
- That 529 plan statements must be provided to both parents
- How future contributions should be handled
- What to do with any leftover 529 plan funds after the child finishes college
- What to do if the child decides not to go to college
- Whether the 529 plan funds count toward a parent’s college support obligations
Financial aid considerations in divorce
The parent who provides greater financial support to the student must complete the Free Application for Federal Student Aid (FAFSA), regardless of whether or not this is the custodial parent. The custodial parent is generally the parent with whom the child primarily lives. Note that prior to the 2024-2025 FAFSA the custodial parent was responsible for filling in the FAFSA, but this rule has been changed as part of FAFSA simplification.
A 529 plan that is owned by the parent filing the FAFSA is considered a parental asset on the FAFSA and distributions are ignored. Parent assets can reduce financial aid eligibility by a maximum of 5.64% of their value.
If a 529 plan is owned by the non-FAFSA filing parent, the assets are not reported and distributions from this 529 plan are also not reported as income under the new FAFSA rules.
FAQs
Unless the divorce decree states otherwise, an ex-spouse who is the 529 plan account owner can legally take distributions for non-qualified expenses and deplete your child's college fund. They can also change the beneficiary from your child to their stepchild.
How are 529 plans treated in divorce? ›
When it comes to dividing assets in a divorce settlement, 529 plans are typically treated as marital property. This means that they can be divided between the divorcing spouses through negotiation or court order.
Who owns 529 plan, parent or child? ›
A 529 plan must have an owner (such as a parent or grandparent) and a beneficiary (the student). The owner controls the contribution level, investment allocation and how and when to disburse funds. The owner also can change the 529 beneficiary.
Can I transfer ownership of my 529 plan to my child? ›
All 529 plans allow the account owner to change the designated beneficiary, and it's actually quite simple to do. Just fill out a change of beneficiary form and submit it to your 529 plan administrator. Depending on your plan, you may have to pay an administrative fee.
Does a 529 plan belong to the student or parent? ›
Account Ownership
The value of a 529 plan owned by a dependent student or a parent (529 plans do not allow joint ownership) is considered a parent asset on the FAFSA. The first approximately $10,000 will fall under the Asset Protection Allowance (the exact amount depends on the older parent's age).
Can a parent take back 529 funds? ›
You can transfer the funds to another eligible beneficiary, such as another child, a grandchild, yourself or a friend. If you just want the money back, you can withdraw the funds at any time.
Who remains control over the 529 plan? ›
The account holder maintains ownership of the funds
Unlike other college savings vehicles, such as custodial accounts, 529 plans allow the funds to remain under the account owner's control, meaning you can withdraw the money at any time (though taxes and penalties may apply; more on this below).
What happens to 529 when a child turns 21? ›
What happens to 529 money when a child turns 21? 529 accounts owned by parents stay in the parents' control so long as they'd like.
Can a child put money into their own 529? ›
Who Can Give to a 529 Plan? Just about anyone can make a contribution, either to an account they own or to an account owned by someone else. The beneficiary can be your: Child.
What is the grandparent loophole 529? ›
The FAFSA Simplification Act brings a lucrative “grandparent loophole” that allows you to contribute generously to a 529 plan without jeopardizing your grandchild's eligibility for financial aid. This opens up a wealth of strategic opportunities for families.
So, if your child opts out of college, you can name a younger sibling or even a niece or nephew or potentially another relative. And you can even name you or your spouse as the beneficiary if you're interested in furthering your education.
Can I transfer 529 funds to a Roth IRA? ›
As of January 1, 2024, owners of 529 plan accounts can make tax and penalty-free rollovers to Roth IRA retirement plan accounts, subject to certain limitations. This has been welcome news to many families who worried about having unused or leftover funds in a 529 plan account.
Who controls the assets in a 529 plan? ›
Control over a 529 plan's assets typically resides with the account owner, who can make strategic investment decisions for the beneficiary and manage withdrawals so that the funds are used for qualified educational purposes.
Can divorced parents contribute to the same 529? ›
A 529 plan can have only one individual who exercises the power of withdrawal. Both parents can make contributions and both parents can have access to the activity in the account, but only one can be the designated owner of the account.
What happens to 529 when a child turns 18? ›
The custodian's job is to manage the funds in the 529 plan on behalf of the beneficiary until they reach adulthood. In most states, that means age 18, though in some states the age threshold may be higher. The custodian can't change the beneficiary or account owner.
Can a 529 plan be held jointly? ›
A 529 plan account owner never pays tax or penalty on the contribution portion of the withdrawal. Most 529 plans do not allow joint ownership, which means only one parent can be the account owner. In the event of a divorce, one parent could be left with full control over a child's college savings.
What happens to unspent 529 money? ›
But have you ever wondered what happens to unused 529 funds? You have two options: Withdraw the money or save the unused 529 plan funds for future qualified education expenses. Don't worry; leftover 529 money is common, and you can still make the most of the funds after graduation.
