The Power of 529 Plans in Divorce

October 5, 2023

In a divorce case, the Court has the task of determining whether the parties’ assets are marital or separate property. Once this determination is made, the Court will allocate the assets to each party in an equitable manner. However, in certain situations, the Court may decide that certain assets should continue to be held in the benefit of the parties’ minor child. If parents have contributed to a 529 Plan for their child during their marriage, the account will remain as an asset for that minor child.

The Court will designate one parent as the custodian of the 529 Plan to manage the funds, but that parent does not have the liberty to spend the money at their discretion. In certain cases, the custodian may be required to provide quarterly statements to the other parent. Further, the parties may be ordered to submit expense requests to the Court for approval.

Maximizing the Benefits of 529 Plans

A 529 Plan is an account where contributions and earnings grow tax free. Additionally, the 529 withdrawal is tax-free when used to pay qualified higher education expenses. Furthermore, a person who owns a 529 account can deduct their contributions from their Ohio taxable income. This account can be used not only for educational expenses, but also  to allocate $10,000 towards federal student loan payments.

Parents can fund a 529 Plan with confidence, knowing that the asset will continue to benefit their minor child. There are even more reasons to contribute to a 529 Plan now with the introduction of “Secure 2.0.” In 2019, the U.S. government made changes to the retirement system through the Secure Act of 2019, and Secure 2.0 expands those benefits, including the impact of funds held in a 529 Plan. Beginning in 2024, beneficiaries of 529 Plans can roll over any unused money into a Roth individual retirement account (IRA) without incurring income tax or tax penalties.

Understanding Rollover Limits and Requirements

If a child does not pursue college or attends a less expensive institution than expected, there may be leftover funds in the funded 529 Plan. Previously, surplus funds could only be withdrawn with taxes and penalties. Now parents can be relieved knowing that their minor child can start their life with a funded Roth IRA.

It is important to note that rollovers are limited to a lifetime cap of $35,000 for transfers from a 529 Plan to a Roth IRA. In addition, the account must have been open for at least 15 years, and contributions made in the last five years cannot be rolled over.

For parents looking to invest in their child’s future, contributing to a 529 Plan is a wise choice. Not only will it be protected in the event of a divorce, but it also offers significant benefits to your minor child, no matter their future plans.

For questions regarding allocating assets such as a 529 Plan during a divorce, please contact KJK Family Law Partner Carly Boyd (CBoyd@kjk.com; 213.736.7254).