Divorce brings with it many financial decisions, and education funding is often one of the most significant. If you’ve saved for your child’s education in a tax-advantaged account, you may be wondering how to handle those funds now that you’re separating from your spouse. Fortunately, there are several options available that can allow you to divide these assets, continue saving for your children, and even plan for their future in more flexible ways. Here’s a look at the possibilities.
1. It’s Your Money—Pay the Tax and Divide It
One option to consider is simply cashing out the education savings, paying any applicable taxes, and dividing the remaining funds between you and your ex-spouse. This may be necessary if neither party wishes to take responsibility for managing the account going forward or if both parents agree to manage the education costs separately.
However, it’s important to note that cashing out education savings accounts, like 529 plans, could lead to taxes and penalties if the funds are not used for qualified education expenses. Before opting for this route, consult a tax professional to ensure you fully understand the tax implications.
2. Gift the Funds to Your Children
Another option is to transfer ownership of the account or give the funds as a gift to your children. If you’re confident that your children will use the funds for education expenses, transferring the account into their names may be a straightforward solution. This can be done while maintaining the tax advantages associated with 529 plans or other education savings vehicles.
Gifting the funds ensures that the money stays dedicated to your children’s education and gives them control over how and when the funds are used. However, it’s important to understand the legal and tax ramifications of transferring account ownership or gifting large sums of money.
3. Hold on to the Funds for Future Education Expenses
If your children don’t currently need the full amount saved for their education, you can leave the funds in the account for potential future use. This option gives your children the flexibility to use the money if they decide to pursue further education, like graduate school or career training programs, down the road.
529 plan rules, for example, allow for a wide range of qualified education expenses, including trade school, continuing education courses, or even student loan repayments in some cases. Holding on to the funds provides a safety net for your children’s future educational needs.
4. Rolling Unused Funds into a Roth IRA
If your children don’t end up using all the funds saved for their education, there may be an opportunity to roll some of those funds into a Roth IRA if they have earned income. Starting in 2024, new rules allow for the rollover of unused 529 plan funds into a Roth IRA, subject to certain limits and conditions.
This can be a powerful way to ensure that unused education funds continue to benefit your children’s financial future. However, there are several caveats to this option: the Roth IRA rollover is subject to annual contribution limits, and the 529 plan must have been open for at least 15 years. Understanding these restrictions and working with a financial professional is key to making this option work for you.
Conclusion
Education funding after a divorce doesn’t have to be a point of contention. Whether you choose to split the funds, gift them to your children, or hold on to them for future needs, there are flexible options available to support your children’s education. Exploring these strategies with a divorce financial analyst, like those at Alternative Divorce Solutions, can help you make informed decisions and ensure that your family’s financial future is protected.
