On 529 Plans and divorce: What are the things to consider?

Should you liquidate your child’s 529 plan after a divorce? That is a good question. It depends on the type of plan, and it depends on why you want to liquidate it.
529 plans, as you know, are a type of college savings plan. There are two types, a prepaid plan and a savings plan like an IRA or a 401K. The beauty about these plans is they allow you to save money towards your child’s education tax free. So from the time your child is young you can begin saving and when college rolls around, it is not so prohibitive to afford.
The thing is, sometimes you get divorced before your child reaches college age. And here you have this chunk of change you amassed for your child’s benefit. Now it is just this asset to consider in an equitable distribution or community property scheme, depending on where you live.
In some states, qualified distributions are tax free. It can be deducted from your income tax returns. But if your distribution is “unqualified” you may find yourself having to pay a tax on the “recapture” income since you were allowed to deduct it and not pay tax on it, initially.
My sense is that if you want to get the funds back due to a divorce, you have to prepare yourself that this is not a qualified distribution and you will pay state taxes on it, and maybe even federal taxes too. The only time I think you can withdraw without penalty from a 529 plan is if the beneficiary dies, is disabled, or has received a scholarship.
Educational expenses can be tremendous in this day and age and it is smart to plan for your children’s education even if you are getting divorced. You should however, by all means, consider splitting the account like any other asset so that both spouses share a stake in the funds that have accumulated, and both have some control over at least a portion of the funds, after a divorce. You can’t leave the power with just one party because she or she can bleed the account dry and by the time the child is ready for college, there may not be any money to pay for it.
Also, in the divorce stipulation, be clear about how those funds can be used. Remember that former spouses re-marry and new children can come into being. So the stipulation of settlement of your divorce should clearly articulate who the beneficiary is and how the funds can be used or withdraw. REQUIRE A DOUBLE SIGNATURE FOR ANY WITHDRAWALS.
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