Divorce can be an incredibly complicated and confusing experience; the financial implications of separating from your spouse present yet another layer. One of the often overlooked details is what happens to your 529 accounts during a divorce. Managing these accounts, divided between multiple parties, is a challenging feat – which is why it’s essential to understand all the pieces involved in navigating this process. In this blog post, we’ll cover everything you need to know about managing your 529 account when getting divorced, including tax considerations and outlining guidelines for withdrawals or transfers. We hope that by providing this information, we can ease a bit of the stress associated with such a difficult journey.
First and foremost, it’s essential to understand that a 529 account owned by either parent is considered a marital asset if it was funded by either parent’s income (as opposed to a gift from a grandparent, for example). This means that any money put into the account during the marriage is considered jointly owned by both parties. It also means that the report will likely be subject to division during divorce proceedings. The ownership of the account can impact financial aid eligibility for your children, so it’s essential to make sure it’s adequately managed during and after the divorce.
The following vital piece to note is that there can only be one account owner. This means that in the event of a divorce, one spouse will continue to have full ownership. However, this doesn’t mean that the other spouse is left out entirely. Account management, including contributing funds and making withdrawals, can be negotiated during the divorce process. It’s crucial to have open and honest discussions about how the account will be managed going forward to ensure both parties are on the same page.
When it comes to tax considerations, there are a few things to keep in mind when managing a 529 account during and after a divorce. Any funds withdrawn from the account for qualified education expenses are not subject to federal income tax; however, if the version is not used for education-related purposes, any earnings will be subject to income tax and a 10% penalty. In the case of divorce, it’s essential to make sure that both parties understand their responsibilities when it comes to taxes related to the account.
Finally, guidelines for withdrawals or transfers should be established during the divorce process. This could include a set amount or percentage of funds that can be withdrawn each year, as well as any restrictions on transferring the account to another beneficiary. Again, open communication and negotiation between both parties are crucial in ensuring that the 529 account is managed correctly post-divorce.
In summary, managing a 529 account during and after a divorce can be a complicated and challenging process. It’s important to understand that the account is considered a marital asset, and only one person can be the account owner. Communicating openly and negotiating account management, tax considerations, and guidelines for withdrawals or transfers with your ex-spouse is crucial in ensuring that your children’s education savings are protected during this difficult time. Hopefully, armed with this knowledge, navigating your 529 account during a divorce can be more accessible.
Are you facing a difficult divorce that involves the division of assets, including a 529 account? Look no further than Mullett Dove & Bradley Family Law, PLLC. We understand that every case is unique and requires personalized attention. That’s why we work closely with our clients to understand their specific needs and goals and develop a strategy tailored to their situation. Need help navigating the divorce process and division of assets? Contact us today to schedule a consultation and learn more about how we can help you!