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How to Address Leftover Funds in 529 Plans in a Divorce in Georgia

Publish Date: 06/30/2025

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

Categories:

Divorce Process
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