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 account owner, 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 other qualifying family member without tax consequences.
If a 529 plan is used to pay for anything other than qualified education expenses, such as tuition, fees, books, supplies and equipment, K-12 expenses, student loan repayments, or a rollover to a Roth IRA for the beneficiary, 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 a divorce, 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
- Make themselves the beneficiary and use the 529 plan to further their own education, pay down their own student loans, or use for any other qualified expense
- 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
- That the parent who owns the 529 account names the child, and not the parent’s new spouse, as successor owner to the account if the parent dies
- 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
It is also worth addressing who bears any state income tax recapture, since several states claw back a previously claimed deduction when a non-qualified withdrawal is taken, and the recapture can land on the parent who claimed the deduction rather than the one who took the money.
Financial aid considerations in divorce
The parent who provided more than half of the student’s financial support over the last 12 months must complete the Free Application for Federal Student Aid (FAFSA), regardless of whether or not this is the custodial parent (i.e., the parent with whom the child primarily lives). If the two parents split support equally, the parent with the greater income files. Prior to the 2024-2025 FAFSA the custodial parent was responsible for filling in the FAFSA, but this rule was 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. Accounts that same parent owns for the student’s siblings are not reported at all, only the account designated for the student completing the form counts.
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.
