Atlanta Financial Blog
My Ex and I Can’t Agree on Splitting College Costs: 5 Smart Ideas for Coming to An Agreement
November 5, 2019
If you have kids and are headed for divorce, one of the most difficult negotiations maybe agreeing on how your children’s college tuition will be handled. We have seen this issue come up over and over again in divorces, and it is best to get as much clarity during the negotiation process as possible.
If you have already set aside college funds in specific investments, your agreement should specify how those funds are to be used and ensure both parties have access to statements and transaction details. You should also outline what happens if funds are left over (a happy, but unusual outcome!) However, if you haven’t set aside enough funds for college as you enter the divorce process, negotiations can become trickier. In Georgia, for example, support after the age of majority is non-modifiable, so attorneys and parents alike may be hesitant to build future obligations for college tuition into a settlement agreement. However, your agreement can still spell out what the parties agree to while specifying it is non-binding. An ex-spouse can still renege, but is often less likely to do so when the agreement is spelled out clearly.
If you are already divorced and your settlement agreement makes no mention of college funding, we have put together 5 smart ideas for working with your ex to cover college costs:
- Know your state’s laws. Depending on where you live, you may be legally required to contribute to children’s college costs even if their divorce decree excludes it. Currently, non-custodial parents in 17 states and Washington, D.C. can be compelled to contribute to college tuition and expenses.
- Explore financial aid. The custodial parent should apply for the Free Application for Federal Student Aid (FAFSA). If the custodial parent is remarried, their new spouse’s income and assets are included in the calculation for needs-based financial aid, while the non-custodial parent’s assets and income are not.
- Establish a 529 college savings account for your child. Setting up a 529 for children of divorce can be tricky. The contributing parent most likely should be the account owner. Contributions can be deductible from state income taxes, and there is no annual contribution limit. However, your contributions to a 529 are considered gifts. So, if you want to contribute over $15,000 in a given year, you may need some special guidance to qualify for a 5-year forward averaging treatment to avoid eating into your lifetime gift tax exclusion. A knowledgeable advisor or tax preparer can assist you with this.
- Consider a Roth IRA. Believe it or not, Roth IRA’s aren’t just for retirement. Contributions to a Roth are made on an after-tax basis. But withdrawals for qualified educational expenses (tuition, room and board, books and other fees) are not subject to the early withdrawal penalty. The catch? To avoid income taxes, you can only withdraw contributions (not earnings) from the Roth to fund those college expenses. There are also annual contribution limits to consider. For 2019, you may contribute up to $6,000 (or less, depending on your income). If you’re 50 or older, the annual limit for this year is $7,000—again, subject to income limits.
- Involve your child. If your child has her hopes set on an expensive school, but you and your ex just can’t afford it, you’ll have to temper her expectations. First, let her know there are many highly-rated state schools that provide just as good an education as a pricier private university. Second, make sure your child also contributes to her own education, either through earnings from a part-time job or through scholarships and grants. A college education is often the largest expense a family will face. Engage your child in the discussion and use it as an opportunity to explain how to do a cost-benefit analysis. This exercise can help set your child up for a lifetime of wise financial decisions.
There are many options to consider, and not all are the best solutions in every situation. An experienced financial advisor can help develop a customized plan to make college affordable for you and your children. Most importantly, remember there are many ways to pay for college, but moves that sacrifice your own financial future shouldn’t be one of them..
At Atlanta Financial, we have been by the side of women divorcing for more than 20 years. Through our DivorceFIT™ process, we will walk with you through the big picture financial issues all the way to the smallest of details that need to be addressed as you go through divorce and after. Our goal is to help you transition to the next phase in your life on solid financial footing.
The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law on December 20, 2019. With all of the discussion in the news around the political uncertainty, impeachment, and the looming trade war, one of the largest changes to retirement savings laws in recent years was passed with very little fanfare. However, some of the changes will be significant. I have tried to highlight what may impact the majority of our clients and readers.
The Act has a lot of positives such as simplifying rules and making 401k plans potentially available to more workers, pushing back the RMD age, and allowing contributions to IRAs past age 70. The negative impact I see is the elimination of the stretch IRA which is a clear move by the government to raise tax revenues by forcing money out of inherited IRAs sooner. I will discuss in more detail below, but this should be a time to review beneficiaries and discuss whether any change in your legacy planning should be made in response to the new laws. What do you need to pay attention to?
A few months ago, I saw a sale sign in front of my neighbor Gina’s house. She’s lived on my street even longer than I have, so I was surprised that she was selling her home. I bumped into her a week later at the supermarket and asked her where she was planning to move. She told me (with some regret) that she was downsizing to a less expensive house. The alimony payments she’d been getting from her ex-husband had ended last year, and she hadn’t prepared for the loss of that income. She soon realized she could no longer afford to live in her home.
I’d like to believe that everyone understands the value in a year-end review of their personal finances. Statistics that I’ve seen indicate that over half of people who make resolutions indicate a change to household finances and saving money is a priority in the new year1. What is a bit of surprise to me is that so many put off (or neglect all together) actually reviewing their finances before year’s end. My conclusion: one of the biggest deterrents is the time it takes to get things organized.
When it comes to being successful with money, strong organization will empower you more than anything else you can do to take control of your finances moving forward. With my personal and professional understanding of the challenges of this process, I’ve put together an 8-step checklist to get your finances organized, take inventory of where you stand, and ultimately get you ready to close the books on 2019.