Iowa 529 plan and divorce

Contents:
  1. College Savings Plan: What is a Plan?
  2. 529 Plan Options for a Divorcing Couple
  3. Divorce can derail college savings
  4. How Does a 529 Work?

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It is less likely in these circumstances that one parent will raid an account for his or her personal benefit. Parents who are divorcing need to determine who will remain the custodian of each college savings plan or account. If, for example, a prepaid college account is not fully funded, it is a good idea in the settlement agreement to determine who will continue funding the account until it is fully funded. A skilled family law attorney can simplify the process, and assist in ensuring the college savings plans are safe. Angela R. She is a family and divorce lawyer who focuses on helping those facing the difficult challenges of failed marriages and a confusing legal system.

Learn more at www. Your email address will not be published. Paying off student loans is not considered a qualified higher education expense under current law, even if those loans were used to pay for qualified higher education expenses. Like a Roth IRA, the taxpayer invests after-tax dollars.

The earnings accumulate on a tax-deferred basis and may be entirely tax-free if used for qualified higher education expenses. Contributions may also come from corporations, trusts and other organizations. There is no annual limit to the contributions to a college savings plan.

Cumulative limits vary by state and are generally based on the projected cost of five to seven years of postsecondary education at the highest cost public or private college or university in the state. Maximum contribution limits can change annually. However, contributions to a college savings plan may be subject to gift taxes. If the contribution exceeds the annual gift tax exclusion, then five-year gift tax averaging would apply.

This treats the contribution as having been made proportionately over a five-year period beginning with the current tax year. There is no age limit on contributions or distributions. Funds can be used for undergraduate, graduate or professional school education at any college or university that is eligible for Title IV federal student aid. Contributions must be made in cash or cash equivalents.

For example, checks, money orders, credit card payments, electronic funds transfer EFT and rollover from another plan are permissible. A plan may not be pledged as security for a loan. Investments are chosen from a basket of mutual funds that typically include all-stock funds, low-risk funds and age-based asset allocations. In and prior years, investors may not otherwise direct the specific investments of the plan account.

College Savings Plan: What is a Plan?

However, the Tax Increase Prevention Act of made changes to permit investors to directly and indirectly specify investments up to two times per calendar year, effective starting January 1, The state college savings plans will need to make changes to permit account owners to select individual stocks and bonds, but it is likely that many will make the necessary changes. Contributions to a college savings plan are not eligible for the gift tax exclusion as direct tuition payments to an educational institution under 26 USC e. The beneficiary of a college savings plan may be changed to a member of the family of the current beneficiary.

The college savings plan may be rolled over to another college savings plan or prepaid tuition plan for the same beneficiary or a member of the family of the current beneficiary, but rollovers for the same beneficiary are permitted only once per month period. Many state plans offer special benefits for state residents. Although these changes applied to the tax year, which is now over, experts are still approaching this issue with caution. However, he said that if a taxpayer uses distributions to pay for K—12 expenses before their state has adopted these changes, the distribution may not be considered qualifying for state income taxes.

It also remains to be seen what will happen to taxpayers with out-of-state plans. The majority of states with income tax allow state income tax exemptions for distributions even from out-of-state plans.

529 Plan Options for a Divorcing Couple

The state where you actually pay taxes will determine the consequences. The bottom line is that all taxpayers are eligible for the federal income tax benefits on disbursements for qualified K—12 expenses. So how can you figure out what state income tax benefits are currently available for s and how those benefits may or may not change with the new K—12 rules?

You can find out more about these plans here. Different plans have different costs and investment options. Consider carefully the costs of dipping into your plan before college. Reducing the balance of the account means you compound less interest, which could hurt your education savings bottom line in the long run. Federal aid calculations are complicated, to say the least, so talk to a college financial planning expert about these decisions.

There are some ways to frontload an account, though, and to spread the tax consequences out over several years.

Divorce can derail college savings

So what should you do with the changes in the plan? It may not be beneficial for those who would empty out their college funds for their children on private tuition before college, with the staggering college tuition loan crisis.

Basically, make sure it makes sense for your family. Maybe private high school and college end up being your priorities, for example, and you can supplement K—8 th education if needed. Of course, you should talk with a tax professional familiar with the latest developments in your state about any decisions like these. But ultimately, middle- and low-income families benefit more from stronger school choice programs like education savings accounts ESAs and vouchers.

Curious about how ESAs work? Watch the video below for a quick primer:. To find out if your state has one of these educational choice programs, or a tax-credit scholarship or individual tax credit or deduction , visit our School Choice in America Dashboard.

Abby has been part of the marketing team at EdChoice since She lives in Indianapolis with her husband and two kids.

What Is School Choice? Donate Additional Giving Options. Contact Us. Donate to EdChoice today. Donate Now.

How Does a 529 Work?

Federal rules allow parents to use the tax-advantaged savings plan for certain private K—12 expenses, but it may be more complicated than you think. Distributions from out-of-state plans are not exempt. No tax benefits because Alaska has no personal income tax. Unused excess contributions can be deducted over the next four succeeding tax years. No additional tax benefits.