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Separation agreement tips for college savings

California parents can spend years saving money for their children to apply toward college expenses. Understandably, dutiful savers who are going through a divorce may want to take steps to protect these college funds. In a worse-case scenario, a vindictive spouse could take control of an account and use the money for other purposes.

Common college savings tools include 529 plans, Coverdell ESAs, traditional and Roth IRAs, U.S. savings bonds and custodial 529, UGMA and UTMA accounts. The type of account the money is stored in and the terms of the divorce separation agreement are two factors that affect how the funds can be safeguarded and used as intended.

One of the stipulations that should be included in the separation agreement is the use of qualified withdrawals. The funds may be used for qualified higher education costs provided that there is an equitable and transparent arrangement between the ex-spouses. For a 529 plan, the account owner may also use the funds if the beneficiary becomes disabled, dies or receives some form of a nontaxable education payment.

Non-qualified withdrawals should also be included in a separation agreement. During times of emergencies, it may be more prudent to use the college savings and incur the taxes on the earnings and the 10 percent penalty rather than use the retirement funds.

The successor of the college savings account in the event of the owner's death should also be included in the separation agreement. This can prevent the funds from being re-appropriated by the new spouse.

For the purposes of a divorce, college savings accounts are considered property, the allocation of which is often determined before a divorce takes place and is specified in a separation agreement. A divorce attorney may help negotiate terms that can protect the funds set aside for a child's college education.

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