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What Is a Qualified Tuition Program?
A qualified tuition program (QTP) —also known as a 529 plan— is a tax vehicle that helps families save for future educational expenses. Like qualified retirement plans—known more commonly as 401(k) plans—earnings contributed to a QTP account are not taxed while in the account, pursuant to Internal Revenue Code § 529. Furthermore, distributions from QTP accounts are not taxable if used to pay for “qualified higher education expenses.”
Reforms under the recently enacted Tax Cuts and Jobs Act (TCJA) expanded the meaning of “qualified higher education expenses” from colleges, universities, and other post-secondary educational institutions to include public or private elementary, secondary, or religious school expenses.
Specific expenses for which QTP distributions may be used include:
- Tuition and fees
- Books and supplies
- Adaptive equipment for special needs services
- Room and board
However, the TCJA also imposed a $10,000 annual cap on distributions for 529 plans. If distributions from the plan exceed $10,000 annually, the portion of the excess distribution amount attributable to unrealized gain will be taxed.
529 Plan Funds and Child Support
Many states, including Iowa, recognize a legal duty for parents to provide financial support to their children for their food, clothing, shelter, healthcare, and educational needs. States determine child support obligations based on the specific needs of the children and the financial conditions of each parent.
It may be possible to apply the funds in a 529 plan to satisfy a parent’s child support obligation. For example, a separation agreement or divorce settlement could expressly allow a parent to apply contributions or distributions from a 529 plan to satisfy their child support obligations. The use of 529 plans to satisfy child support is more relevant now since TCJA reforms have expanded 529 plans to include elementary and secondary school expenses.
Division of QTP Accounts Upon Divorce
Whether 529 plans are subject to division upon divorce depends on specific state laws governing dissolution of marriage proceedings. Most states, including Iowa, adhere to the equitable distribution system of dividing marital assets. Under the tenets of equitable distribution, marital assets will be equitably divided between the parties upon divorce. All assets acquired during the marriage are considered to be marital property unless evidence indicates that they are the separate, nonmarital property of the individual spouse. Nonmarital assets include all property acquired before marriage and after divorce.
Courts in some jurisdictions have treated QTP accounts as money set aside for the child’s benefit and therefore not subject to division upon divorce. However, some courts have treated 529 plans as an asset of the parents. Furthermore, a divorced parent with sole custody of the child must submit a Free Application for Federal Student Aid (FAFSA) to obtain student loans. A custodial parent who owns a 529 plan must include it as an asset on the FAFSA application. In contrast, a noncustodial parent will not report a 529 plan they own on a FAFSA application. This fact tends to support the idea that 529 plans can be considered to be marital assets divided upon divorce.
Get Comprehensive Legal Advice from Hope Law Firm
Planning for your child’s educational needs is an essential responsibility for a parent. Whether parents are divorced or otherwise separated, issues related to finances and property, such as a 529 plan for your child’s education may have legal implications you should know about. At Hope Law Firm, we can guide you through the legal aspects of various family law matters, such as divorce and child custody proceedings.
For a free consultation, call us at (515) 305-2772 or complete on online request formtoday.