Welcome to another installment of #AskGradMoney, where on Facebook, Twitter or Instagram, you can send any or all of your money, stock market, budgeting, retirement, estate planning -- literally any money question to GradMoney and we will respond in the form of a blog post so other folks can benefit from our response. If you wish to have your name published with the question, just let us know, otherwise you'll be listed as "anonymous."
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Anonymous, new York:
"I'm in a bit of a unique situation now and need some advice. My wife and I are divorcing and I will be receiving 50% of her 401(k) assets. However, I would much rather take that money an roll it into my son's 529 College Savings Plan since I personally don't need it and would rather have that money be put to work for him. He's only 6 now. If I do this, will I have to pay a penalty of some sort? Thank you for your help!"
Firstly I'm so sorry that you have to go through a divorce - those are hard on couples and especially on children. Be sure to hang in there, and if you need some financial advice after a divorce, I have some helpful information HERE.
Now, as far as rolling that money into a 529 plan things are a bit difficult. Unfortunately, you would have to pay taxes on that conversions between a 401(k) and the 529 Savings Plan. Sorry :( However, you are not obligated to pay the 10% penalty since you are receiving funds from an ex-spouse's 401(k) plan. So that's good. However, there are some restrictions on limits when it comes to funding a 529 plan, and you certainly don't want to have to pay all of those taxes at once.
If you want to avoid the tax situation and you really want that money to be allocated for the purpose of sending , a way around this is to take that 401(k) money and roll it over into a Rollover IRA. Later, when your son is old enough, you can tap into the IRA funds to fund college/tuition expenses, even if you are under age 59 1/12, and you won't have to pay the 10% penalty; just taxes on the amount withdrawn.
The other benefit of doing it this way is that if your son does not end up going to college or needing that money, then you can keep it for retirement...which that was its ultimate purpose anyway.
The thing you should note is that the money is yours right now, and you can still invest it for your son's future, but you can leave your options open for the time being and this way you can change your mind.
All the best of luck with everything!
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