College Savings in Your Divorce Settlement
Don’t assume you and your spouse will split the money in the divorce, and don't assume the money will be used for your child's benefit. Make a suggestion for how you'll handle your college savings for your child.
Clarifying how you’ll split the money with your spouse is an important part of finalizing your divorce, so your divorce settlement agreementshould address as many financial questions as it can, including college savings.
The agreement you propose to the court should be thorough and specific. Otherwise, the judge may make decisions for you.
If you’re saving for your child to go to college
Many U.S. adults who are able to save for college choose to open a 529 account. That’s an account in a tax-advantaged investment plan known as a “529.” Each plan follows the tax rules of a U.S. state as well as federal tax rules.
People may have their own reasons for investing this way. Their state may give them tax benefits for their contributions to this kind of account. They won’t owe federal tax on the earnings while the investment is growing, and they’ll never owe that federal tax if they ultimately use the money to pay for college.
If you or your spouse are saving for your child’s education, read on.
The account owner controls the money
If you’re divorcing and you have a 529 college savings account, you’re probably asking: Whose money is it?
When an adult invests in this kind of account, they must indicate the name of the person—often a child—for whose education they’re saving. At any time, they can change their mind about whose college costs they’re saving for, and they can update the name on the account.
The adult who invests the money is usually listed as the legal account owner. Just because the child’s name must be on the account, too, doesn’t mean the money belongs to the child.
The account owner can withdraw the money at any time. As mentioned, they’ll owe a tax penalty if they withdraw it to pay for something other than college. But it’s their money, and accepting a tax penalty is their choice to make.
That’s why it’s important to decide who will control this money after your divorce. If you don’t propose an arrangement, the court may decide for you.
If you only reach a partial settlement
Some settlements are partial, meaning you’ve reached an agreement with your spouse on certain issues, but you’re asking the court to decide other things.
Remember to make a suggestion about your college savings for your child. Because a 529 account is designated for someone’s college expenses, a judge may treat it differently than other investments. Don’t assume you and your spouse will split the money in the divorce, and don’t assume the money will be used for your child’s benefit. The judge may have their own ideas about how to treat college savings. Share your ideas with the court.
Make a decision about college savings
If you have specific ideas about what should happen with your college savings, write your intentions in your settlement agreement.
Mention any investment account that you or your spouse has. In case you need to show proof, get an up-to-date account statement showing the current balance and gather evidence of your contribution history. In your agreement, say:
- Whether either or both of you expect to continue contributing to the account
- Whether you’ll consider your contributions to be gifted to the other parent or to your child
- How you expect the funds to be used
If another family member—like a grandparent—is saving for your child’s education, you may want to mention that too. The information can help your lawyers and the judge understand the broader landscape of your financial planning.
Remember to keep up with changes in the laws about college savings, including how certain types of accounts can affect a student’s eligibility for financial aid. Your investment choices can make a big difference in your child’s future.
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