This comes up all the time in divorce and separation agreements – what do we do with any left over money that may be in our child/ren’s 529 accounts? In the past this topic would generate more discussion that you may think. There are a lot of options for monies still remaining in a 529 after college is complete.
One option is to give the money to the child, but its easy to have differing opinions about when the children is old enough and/or mature enough to receive a large sum of money that might be remaining in the 529 account.
Another option is to give it to one or both of the parents. But this could impact the plan for division of the rest of the marital estate. There are also tax implications; often times only one of the parents is actually listed as an account holder. Again more complication!
But Congress recently passed the Secure Act 2.0 a bill that (amongst other provisions) starting in 2024, you may convert up to $35,000 dollars, tax free, from a 529 account into a Roth IRA account. That account must be owned for at least 15 years and is subject to standard Roth IRA contribution limits/rules (for the beneficiary, not the parents). There are several other considerations and rules so its best to talk with your accountant and/or attorney to make sure that you fully understand these rules and the restrictions.
Regardless, these changes have great implications in divorce. Parties/parents can now move up to $35,000 into a Roth IRA for the child, which could address a number of questions/concerns about children laying hands on that money directly. It also addresses any additional tax implications that could make a separation agreement more complex.
These 529 rule changes are important to review with your attorney and to consider when you are solving the complex issues in your divorce matter.