What to Do With a College Savings Plan in an NJ Divorce?
Explore the Effective Ways to Manage a 529 College Savings Plan During a Divorce in Howell, Freehold, Point Pleasant, and nearby Towns in Ocean and Monmouth Counties
College expenses are on the rise year after year. Since 1980, college tuition and other expenses, such as room and board, books, and materials, have increased at a rate of 1184%. 70% of college graduates are between $50,000 and $135,000 in educational debt, choked by varying interest rates and jobs in which they are underemployed, leaving them further and further in debt. Parents who contribute to a savings plan for their children’s educational future want to provide a financial springboard to lower the possibility of debt.
The Basics of the 529 Plan in New Jersey
It is a college savings plan from which taxes are not taken. The number 529 is used as its description because it refers to the tax code section reserved for college savings plans. The 529 plan is a tax shelter for a savings account established for children by their parents to cover the costs of superior education. Once the children begin attending college, the money can be used.
Major Benefits of a 529 Plan
The most obvious advantage is the tax benefits. The savings in the plan are tax-free when used to pay for items such as college tuition, room, and board, student fees, academic materials, and costs associated with qualified education expenses of up to $10,000 per beneficiary per year.
A 529 account can be associated with a specific bank account or payroll deduction system online. As it is an automatic deduction from an account, there is no extra paperwork required. An investment manager supervises the plan, and any issues can be handled through them, so basically, it is a financial plan free of worry and complexities.
A 529 plan is not counted as income and, therefore, has little effect on a student’s federal financial aid possibilities. You can deposit as much or as little as you want without feeling pressured by outside factors.
How Does a 529 Plan Operate?
It is similar to 529 plans in other states but is treated differently about state taxes. The amount in the plan is subject to New Jersey state taxes. To balance that out, New Jersey offers a $25,000 threshold for financial aid. That means the first $25,000 in a 529 plan is not considered for state financial aid.
You can withdraw money from your account at any moment for any reason. If the money you take out is not for education-related expenses, you will have to pay a 10% fee, and whatever you remove will be subject to federal and state taxes.
Those whose annual gross income falls below $200,000 can be eligible for state tax exemptions of up to $10,000 per year.
Who Is in Charge of the Money in a 529 Plan?
The owner of the account controls the funds. An investment manager oversees the account but needs to decide when and how the funds are spent.
The account owner is the adult who invests the money, and they must name the beneficiary for whom the funds are destined. They can change the beneficiary at any time and the name on the account. Just because the beneficiary’s name is on the account does not mean that the funds belong to them.
What Happens to a 529 Plan During a Divorce Process?
A 529 savings plan is a shared asset. It is not the child’s asset. The family court can decide how to divide the money through the process of equitable distribution, but it is usually recommended that the funds in the account be split down the middle, which allows each partner to continue to contribute to the plan in the way they see fit without concerns that the other spouse will abscond with the funds. One could consider leaving the account as is when cooler heads prevail, but divorces are not known for cooler heads. The spouse whose name is on the account can withdraw all the money without anyone’s permission. Splitting the account has no extra fees or penalties. It is important to protect the money intended for the child’s future education.
Options for Handling a 529 Plan During a Divorce
There are several ways to manage a 529 account during a divorce. Much of it depends on how amicable the separation is. The trust factor between the spouses determines the measures to be taken.
The account owner at will can freeze the account. The funds can be used for anything, but there is a tax penalty if they are used for anything unrelated to educational expenses. If you and your spouse are both named on the account, either of you can withdraw money for any purpose. By freezing the account, no more deposits are made, and the account owner cannot take any money out. The amount saved still collects interest, but by freezing the account, the funds cannot be used for anything other than their intended purpose, including paying for a child’s education from a new relationship.
You and your spouse can agree to split the account into two separate ones, with each parent named their account owner. In that vein, deposits and withdrawals can be made by the account’s owner. When the shared assets are distributed, the judge could mandate one spouse to contribute more than the other to the child’s education. The account owner could deposit those funds in a clean and transparent action. For example, You and your spouse split an account with $120,000 into two accounts of $60,000 each. In the divorce settlement, you must pay an additional $20,000 toward your child’s college expenses. You can make the payment to your spouse, who will deposit it directly into the 529 account.
Another option is to completely liquidate the account and divide the balance with all the financial and marital assets. The concern with this choice is the amount of taxes that would have to be paid, which could present a more significant loss of income than other options that were chosen.
If there are leftover funds after a child has finished college, the divorce settlement should address this possibility. Another sibling could be designated the beneficiary, or either parent could use the account to fund their return to college for further studies. Another option could be to pay for graduate school for the children.
Discuss with Our Attorneys How to Manage Your 529 Plan in a New Jersey Divorce Context
With all of these options, it is essential to make an educated decision. There is no hard and fast rule to follow. Every family’s needs are different, and an attorney can discuss the pros and cons of what is best for you and your children. A lawyer can provide an objective, logical panorama to guide you through the decision process.
You can avoid costly mistakes and extra taxes by working with our seasoned family law attorneys at the Bronzino Law Firm. We will represent you and your children’s best interests with professional experience in Holmdel, Toms River, Jackson, Point Pleasant, Beach Haven, Marlboro, Monmouth County, Ocean County, and along the Jersey Shore. We know how hard you have worked to create this plan and save for your children’s future. Our knowledgeable team can help protect your assets.