You may have started a college savings account for your child, or have a joint bank account in their name, or have individual accounts that carry their name only. What happens to these accounts if you and your spouse end up filing for divorce?
If your spouse’s name is on the accounts, the risk is that he or she could drain them. For this reason, get copies of the account statements and let your attorney know about the accounts so that he or she can ask the court to freeze them. If your name appears on the accounts, make sure you leave them intact during the divorce proceedings.
What happens to college savings plans, aka 529 plans? As we discuss in detail in our recent blog, Saving for College: What Happens to a 529 Plan When You Divorce?, this money can be withdrawn by an account owner at any time for any reason – for example, to buy a car, pay for a vacation or for another purpose – though a tax penalty is assessed for any non-education spending. If you and your spouse are both listed as owners, one or the other of you can withdraw money. This may not have been an issue during your marriage, but now that you are divorcing, keeping this kind of joint account may be tricky.
As a first step, freezing a 529 plan account means no more deposits are made to the account and no withdrawals can be made by an account owner. The money already in the account can collect interest, but can only be used toward education for the child designated. This can prevent a disgruntled spouse from making a bad decision during the coming years and safeguard the money for its intended use. Freezing the account also prevents a parent from using account funds to pay for the education of a child from a new marriage.
What happens to savings accounts or savings bonds that are in the child’s name only? Typically, these remain separate and do not enter divorce proceedings or financial settlement talks.