529 Plans and Divorce

If you have a 529 plan for your children and are going through a divorce, you may have some questions. In Arizona, the laws surrounding 529 plans might be different from other states, so it’s important to know your state’s specific laws. In this post, we’ll answer some of the biggest questions people have regarding 529 plans and divorce in Arizona, including some recent changes to the rules.

Watch Mara discuss changes in the 529 College Savings Plans on Cronkite TV.

Understanding the 529 Plan for Your Kids’ Education

A 529 plan is a specific investment account meant for costs related to a child’s education. Generally, parents contribute to this account over time in preparation for education expenses such as tuition and supplies. What’s more, these accounts are not exclusively for costs related to university, but for costs related to any type of education.

Previously in Arizona, individuals could deduct up to $2,000 total from their state income taxes for money that was deposited into a 529 account. However, recent changes now allow parents to deduct up to $2,000 per 529 account (per child). That means that if you have 3 children, you can contribute up to $6,000 in deductions. While this change went into effect in September, you can still claim the benefit on your 2021 taxes if contributions are made by the end of the year.

What Happens to a 529 Plan In a Divorce?

A 529 plan may be an asset if community funds were used to fund the account, so it can be distributed in several ways in a divorce, depending on which person is the account owner and the relationship between the parents. Some options are:

  • Splitting the account.
  • Freezing the account until the beneficiary (child) reaches the age of majority.
  • Hiring a third party to manage the account.
  • Coming to an agreement on how the funds will be used, including any remaining funds left over after the costs of education have been paid

Additionally, if both parents agree to maintain the account for their child, they should address how future funding of the account will be handled.

Does a 529 Plan Belong to the Parent or the Child?

Generally, the account owner of a 529 plan is the parent (or could be a grandparent or other relative)  while the beneficiary is the child. A child can become the account owner once they reach the legal age of majority, which in Arizona is 18 years old.

Do 529 Plans Count as Assets?

If community funds were used to establish and fund the account, A 529 plan is usually counted as an asset of a marriage, but not necessarily the asset of an individual. In this sense, it is treated as “community property” and can be split between the couple.  However, if one parent agrees to continue to fund the account after divorce, those are sole and separate contributions.

How Do You Split a 529 in a Divorce?

You can’t technically split a 529 account as it belongs to the owner of the account.  But, if the account was funded with community funds, you could credit the other parent somewhere else in the division of assets in an amount equivalent to 50% of the 529 contributions.  Most parents in our divorce mediations choose to leave the funds in the account for the benefit of their child, with the owner parent managing the 529 account but agreeing to provide full access to the statements for the account to both parents.  They also sometimes agree to split any excess left over (although having any funds left after payment of educational expenses is a rarity).  They may also include provisions where one or both continue to contribute a minimum amount to the 529 account and/or the other parent may establish a separate 529 account.

Conclusion

If you’re having trouble sorting out the 529 plan in your divorce, mediation services might be a benefit to you. At Affordable Mediation, we aim to make divorce easier for everyone. Check out our free downloadable Divorce Mediation checklist for assistance in easing the stress of your divorce. And if you find yourself needing more help, our team would be happy to lend a hand.

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Use this checklist to make sure you’re properly prepared for your next steps and ensure that you are considering important items in preparing for your Divorce Mediation. We have compiled this list from years of helping couples and families through mediation.

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