Dividing a 529 Plan
Divorcing parents in Georgia may need to address what will happen to leftover funds in their children's 529 plans, if there are 529 plans in place. A 529 plan is a tax-advantaged way to save money for a child's future college or other qualified higher education expenses. See generally 26 U.S. Code § 529 ("Qualified Tuition Programs"). In Georgia, the state government offers the Path2College 529 Plan.
Overfunded 529 Plans
Whether the divorce is uncontested
or contested, it may be wise to discuss and spell out how overfunded 529 plans
will be disposed of after the divorce. There may be unused funds in the 529
plans due to many circumstances. For example, receiving a college scholarship
could mean that not all the funds in the 529 plan may be used. Another example
could be a situation where the child does not go to college at all. Regardless
of the various potential circumstances under which the 529 plan may be
overfunded, divorcing parents may want to include specific language addressing
such leftover funds in a settlement agreement or final decree.
Legal Language Addressing Overfunded 529 Plans
In an uncontested divorce, the
settlement agreement could spell out what happens to overfunded 529 plans. In a
contested divorce, the court could order what happens to overfunded 529 plans.
There are many ways to address leftover funds in 529 plans, and the following
are some examples:
1) Rollover to Roth IRA in the Name of Beneficiary
Due to fairly recent federal legislation
(SECURE 2.0 Act of 2022), a parent/account owner can roll over funds in a 529
plan to a Roth IRA account. See generally 26 U.S. Code § 529 (c)(3)(E).
Such rollovers, if the requirements are met, will receive favorable federal tax
treatment (i.e., excluded from income tax and penalties). The requirements for
such roll-overs include, but are not limited to, the following: (1) the 529
plan must have been in existence for a 15-year period ending on the date of
such rollover; (2) the rollover amount does not exceed a lifetime rollover
amount of $35,000; (3) the rollover amounts are subject to the annual
contribution limits for Roth IRA's; and (4) the amount of contribution and
earnings therefrom during the 5-year period preceding the rollover will be
excluded. Of course, the name of the beneficiary of the 529 plan must match the
name of the Roth IRA owner.
2) Leave Leftover Funds for Later Use
Many children proceed to graduate school
programs after college, so it may be wise to leave the leftover funds in the
529 plan for that possibility.
3) Change Beneficiaries
Subject to certain limitations, a parent
could change the beneficiary of the 529 plan, including designating the parent
himself or herself as the new beneficiary. If it does not look like the older
child will use the leftover funds in the 529 plan, then the parent could
perhaps change the designated beneficiary to the younger child. Alternatively,
if the parent wants to go back to school, then the parent could become the
designated beneficiary.
4) Use Leftover Funds for Certain Non-Qualified Educational Expenses
Generally, using funds in a 529 plan for
non-qualified educational expenses may result in a 10% penalty on top of income
taxes at the federal level. For some non-educational expenses, a parent may
avoid the 10% penalty at the federal level. See generally 26 U.S. Code §
530 (d)(4)(B). For example, the 10% penalty may not apply to a withdrawal of
the 529 plan funds when the beneficiary dies or becomes disabled. Also, the 10%
penalty may not be applicable, to a certain extent, where the child attends the
United States Military Academy, the United States Naval Academy, the United
States Air Force Academy, the United States Coast Guard Academy or the United
States Merchant Marine Academy.
Keep in mind that each option may
have tax implications, both at the federal and state level. Therefore, it may
be wise to consult with a tax professional about these options. If division of
a 529 plan is an issue in your divorce case, please chat with a Georgia Divorce
Lawyer or Atlanta Divorce Lawyer.
Written by: Daesik Shin