It’s the time of year when graduating high school seniors are looking forward to going off to college. Many spend the summer planning their dorm décor and worrying about roommates while parents plan for footing the bill. Negotiating college costs as co-parents can be stressful for the parents and the children if there is animosity. Presented herein are several ideas to address higher education costs for children with divorced or divorcing parents.
Start Saving Early
A 529 Education Savings Plan can be tremendously helpful by allowing you to fund a child’s college savings account allowing it to grow over time. The money in a 529 plan grows on a tax-deferred basis until it is withdrawn. If the money is used for qualified education expenses as defined by the IRS, those withdrawals won’t be subject to either state or federal taxes. The current IRS rules on qualified education expenses are fairly broad and roomy to include not only tuition but also room and board, food plans, necessary college items such as required books and electronics as well as costs to start a business in your field of study while in school. They also include many trade or vocational schools.
Since a 529 education fund is a custodial account only one parent can be the owner. The child is the beneficiary. The other parent can be a successor owner, meaning if the original owner passes away the other parent automatically becomes the owner. We recommend this with divorcing parents. Even though only one person can own the 529 plan, it is common in our experience for the other parent to receive statements at their request or have log in information so they can view the account. We also suggest you dictate in the decree what the funds will be used for and keep the definition close to what the IRS allows as the laws can change. For example, language which states these funds will be used first and to the fullest extent allowable under IRS laws for all eligible higher education related costs for the child of this marriage. Also ask your attorney about language which states these funds are ONLY to be used for higher education (or other qualified education costs up to grade 12) for the children of this marriage – and for no other purpose or persons.
We have also seen it mandated that one parent or both parents contribute over the years to their child’s 529 plan. The amounts and parent, or parents to contribute have been varied and dependent on their willingness to help their children with college, state this in a divorce decree and their ability to do so. If this is a choice you make, it can be written into the decree or decided informally without the decree. This is a discussion to have with your attorney.
What happens if your child doesn’t use all of the 529 funds? We suggest writing a solution to this dilemma in your decree. You have options if your child does not use all the funds set aside in a 529 plan for their education. You can return the monies to the parents or redeem the funds and give cash to your children. Both of these options involve a 10% penalty and taxation on the earnings portion (not the principal, only the earnings). Another option is to transfer the funds to another beneficiary or person to use the education funds. With a 529 plan, you’re allowed to change the beneficiary at any time to one of your beneficiary’s eligible relatives. Examples of eligible relatives include siblings and step siblings, parents, cousins, aunts and uncles, and in-laws. Spouses of these family members are often considered eligible beneficiaries as well. Again, we recommend writing in your decree that these funds will be used only for children of your marriage. Another option is to roll the 529 funds into a ROTH IRA for the beneficiary over time. The Secure Act 2.0, which was signed into law on December 29, 2022, allows 529 college savings plan funds (up to a $35,000 lifetime limit) to roll into a Roth IRA for the 529 beneficiary penalty and tax free. The 529 account must have been opened for at least 15 years and the funds must be moved to a Roth IRA in the name of the 529 beneficiary. The annual rollover limit is pegged to the yearly IRA contribution limit, which includes contributions made to any IRA. In addition, the amount rolled over plus annual IRA contributions cannot exceed the designated beneficiary’s earned income for the year. The IRS will likely clarify this process in more detail but as it stands this could be a helpful tax and financial planning tool.
No Savings Plan
If your child is nearing college age and you have not saved over the years, don’t worry. There are other options. Try having a civil conversation with their other parent. This may help tremendously (or not but at least you tried!) Community college for the first two years can significantly cut costs down for your child’s overall education. Your child can live at home with you to save costs and go to a program such as Lone Star College for 2 years at a substantially reduced rate compared to a 4-year university. They can work part time potentially to help pay for their car, gas, and other needs. Third, look to FAFSA or Free Application for Federal Student Aid. This is almost mandatory in today’s age. Entering your child into the FAFSA program enables them to receive grants or loans. We encourage all seniors in high school to contact the school they wish to attend and talk to the financial aid office. They have experts at each school who can help you successfully navigate the FAFSA program and discuss how to work the system for divorced parents. If you are a low-income parent, you may have free monies which you do not have to repay available for your child. Talk to someone in the financial aid office and become educated on navigating FAFSA.
At Divorce Strategies Group we understand how difficult divorce can be. From financial mediation to financial planning, we can help take the fight out of your future. Call us or click here for a complimentary consultation.
