Understanding 529 Plans in Pennsylvania
529 plans are savings accounts with tax benefits created to promote saving for future educational expenses. Named after Section 529 of the Internal Revenue Code, these plans provide a versatile and efficient method for setting aside funds for college and other education-related costs.
The primary purpose of 529 plans is to provide families with a means to accumulate funds in a tax-advantaged manner, ensuring that the financial burden of education is lessened. These plans can be used for a variety of educational expenses, including tuition, fees, books, and even room and board.
The benefits of using 529 plans for education savings are numerous and include the following:
- Contributions to a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. This means that the money invested in a 529 plan can compound over time without being diminished by taxes, allowing for potentially significant growth.
- 529 plans offer flexibility in terms of beneficiary changes, meaning if one child decides not to attend college, the funds can be transferred to another family member without penalty.
It is important to note that 529 plans can have an impact on eligibility for federal and state aid programs. Generally, 529 plan assets are considered parental assets if the account owner is a parent, and they are assessed at a lower rate. This is more favorable compared to student assets, which are assessed at a higher rate (20%). Therefore, having a 529 plan can be beneficial in minimizing the impact on financial aid eligibility.
However, distributions from a 529 plan that are used to pay for the beneficiary's education expenses are not counted as income on the Free Application for Federal Student Aid (FAFSA), which can further help in maintaining financial aid eligibility. Families can also employ strategies such as timing the withdrawals and coordinating with other financial aid to minimize the impact on aid calculations.
Types of 529 Plans Available in Pennsylvania
Pennsylvania offers two primary types of 529 plans: the Pennsylvania 529 Investment Plan (IP) and the Pennsylvania 529 Guaranteed Savings Plan (GSP). The Pennsylvania 529 Investment Plan allows account holders to choose from a variety of investment options, including age-based portfolios and individual fund options.
These investments are subject to market risk, and their value can fluctuate based on the performance of the underlying assets. This plan is ideal for families who are comfortable with investment risk and are looking for potentially higher returns.
On the other hand, the Pennsylvania 529 Guaranteed Savings Plan offers a more conservative approach. This plan allows families to save for future tuition costs at today's rates, providing a guarantee that the savings will keep pace with tuition inflation.
The GSP is particularly appealing to risk-averse families who want the assurance that their savings will cover future tuition costs without being affected by market volatility. Both plans offer unique benefits and can be chosen based on the family's financial goals and risk tolerance.
What Happens to 529 Plans in PA Divorces?
In Pennsylvania, 529 plans are generally considered marital property subject to equitable distribution in divorce proceedings. This means that both spouses have a legal interest in the funds accumulated within the account, regardless of who the named owner is. However, the specific treatment of 529 plans can vary depending on the circumstances of each case.
Courts often prioritize the best interests of the children when dividing 529 plan assets. To preserve these funds for their education, couples may agree to maintain the existing account structure or create a new account for the benefit of the children. Alternatively, the plan may be divided between the spouses, with each receiving a portion of the funds.
In cases where the ultimate goal is often to preserve the 529 plan for the children's education, there may be instances where modifying the account ownership or beneficiary becomes necessary. An attorney can assist in developing strategies to address these situations while safeguarding the child's future.
Who Pays for a Child’s College After a Divorce?
In Pennsylvania, unlike some other states, there is no legal obligation for parents to contribute to their child's college education after a divorce. This means that neither parent can be compelled by a court to pay for tuition, room and board, or other college-related expenses.
However, this does not mean that parents are entirely off the hook. Many divorced parents choose to contribute to their child's college education, often through a combination of savings, financial aid, and shared expenses. Parents can add terms to their divorce settlement that outline their agreement to make certain contributions to their child’s education fund.
Involved in a divorce and worried about the division of property, including a 529 Savings Plan? Contact online or via phone at (215) 515-9901.