Can the IRS Take My Child’s 529 or College Savings Account?

If you’ve put away a substantial amount of money for your children to go to college, you may be concerned about whether the IRS can seize that money if you have a tax debt. Unfortunately, the IRS can usually seize certain college funds with a tax levy if the account owner falls behind on their taxes and doesn’t make other arrangements. 

Wondering how to protect your children’s college funds and other assets? Learn more about what the IRS can take, what steps come before levies, and how to protect yourself. If you’d like additional guidance on how to deal with IRS tax levies, contact the W Tax Group by calling 877-500-4930 or using our online contact form.

Key Takeaways

• College savings accounts aren’t exempt from the IRS’s right to levy assets.
• Your 529 savings accounts may be at risk of seizure if you have ignored IRS notices about your tax debt.
• Certain college savings accounts that are in the child’s name may not be levied, but this depends largely on the terms of the account.
• Working with a tax attorney can help you handle your tax debt and avoid levies.

529 College Savings Plans

A 529 plan is an investment fund run by states or educational institutions to help families save money for college. They offer significant tax benefits, such as tax-deferred growth and tax-free withdrawals for qualified expenses. Qualified expenses include tuition, fees, books, and room and board. 

While the student who ultimately uses the funds is the beneficiary of such an account, the party setting it up—usually a parent, guardian, or other relative—is the owner and custodian. That person remains the custodian until funds are withdrawn.

Many parents prioritize saving for their children’s college expenses, especially as costs continue to rise year after year. But when you rack up tax debt and don’t make other arrangements to pay it, the IRS may seize your assets to cover your debt—and that may include your college savings funds.

IRS Collection Powers

Section 6331 of the Internal Revenue Code outlines the IRS’s right to levy assets to cover tax debt and all expenses related to issuing the levy. The law states that the IRS may seize and sell all property and rights to property, with the exception of certain assets.

These exempt assets are listed under Section 6334, and they include:

• Wearing apparel and school books
• Fuel, furniture, and personal effects
• Books and equipment needed for work
• Unemployment benefits
• Undelivered mail
• Some annuity and pension payments
• Workers’ compensation benefits
• Child support
• A minimum amount of wages to cover living expenses
• Certain disability benefits
• In some cases, taxpayers’ primary residences

College savings funds are not listed in Section 6334, and as such, they’re subject to levy.

Can the IRS Seize a 529 Plan for Back Taxes?

Because adults who pay into a 529 plan are the technical owners of those plans and have access to the funds until they are withdrawn for qualifying expenses, the IRS views them no differently than any other financial account owned by the individual. Therefore, if the person who created the 529 account owes back taxes, the IRS is within its rights to seize that account.

How Other College Savings Accounts Are Affected

Other college savings accounts may be subject to levy, depending on how they are structured and who has ownership of them. 

For instance, UTMA and UGMA accounts are in the child’s name, so the IRS typically can’t touch them unless the child has the tax debt. However, the IRS may be able to seize the funds if the terms of the plan allow the contributing adult to access the funds. Per the IRS, Coverdell education savings accounts are also not exempt from levy.

If a parent has their children’s college savings in the parent’s standard savings account, it doesn’t matter what the funds are earmarked for—the IRS can levy those funds.

State Protection

A number of states, including California and Illinois, protect 529 accounts from creditors. However, the IRS’s right to levy those accounts relies on federal law, which supersedes state law. Even if you have a 529 account that is protected from other creditors, the IRS will still likely be able to seize it.

What Happens Prior to Account Seizure

The good news about account seizure is that it doesn’t happen out of nowhere, unless you fit the very limited requirements for a jeopardy levy. In most cases, the IRS goes through the following steps before accounts are levied:

• First bill: When the IRS determines that you have unpaid tax debt, they start by sending you a CP14 notice informing you of your tax debt and reminding you to pay.
• Reminder notices: If the initial notice goes unanswered, the IRS follows up with a CP501 notice to remind you that you still have to pay.
• Urgent follow-up notices: Upon receiving no response to the reminder notice, the IRS will follow up with CP503 and CP504 notices. These notices are considerably more urgent in nature, indicating that the IRS plans to use a lien and/or levy to cover your tax debt.
• Final Notice of Intent to Levy and Notice of Your Rights to a Hearing: The last step before your assets are at risk of seizure is either an LT11 notice or Letter 1058, which is delivered by certified mail to your last known address. After you receive this, the IRS has to wait 30 days. At that point, they can levy your assets.

If the IRS Can Levy an Account, Will They?

Just because the IRS has the legal authority to levy certain assets doesn’t automatically mean they will. Generally, the IRS starts levying bank accounts and wage garnishment, as these forms of recovery are fairly straightforward. Only if these asset seizures are unable to satisfy the tax debt will the IRS look to other property, such as your 529 account. That being said, if the college savings plan account is the only significant asset you have, it may be at greater risk of being levied.

How to Protect Your College Savings Account

From the first IRS notice to levy, the process of asset seizure is several months long. This gives you plenty of time to address your tax debt and protect your assets. We recommend:

• Responding quickly: It’s easy to ignore IRS notices and hope that they don’t follow up until you’re in a better financial position to pay off your debt. But the longer you wait to take action, the more you end up paying in penalties and interest—and the more likely your assets will be levied. 
• Looking into different payment options: The IRS prefers upfront payment in full, but they know that this isn’t an option for everyone. Potential payment options include installment agreements, offers in compromise, partial payment installment agreements, and currently not collectible status. The options available to you depend on how much you owe and your financial status.
• Contacting the IRS: Staying in contact with the IRS shows them that you’re making a good-faith effort to pay off your tax debt. If you’re too nervous to contact them on your own, you may want to hire a tax attorney. 
• Working with a tax professional: Tax debt is overwhelming and stressful, especially when you feel like your children’s college savings are at risk. With a tax professional, you can get a better understanding of where you are in the collection process and explore different payment options.

The W Tax Group Is Ready To Help

The IRS has the legal authority to claim almost anything you own if you owe them money. Before your tax debt escalates to the point that your college savings accounts are at risk, talk to a tax professional and find out how to get your tax debt under control. The W Tax Group can help taxpayers across the country catch up on past-due taxes, get compliant with all IRS requirements, and get relief from the stress of tax debt. Call us at 877-500-4930 or contact us online to schedule your free tax relief consultation.

Frequently Asked Questions

My child is the beneficiary of a 529 account I opened—can the IRS still seize it?

Yes. A 529 plan is technically owned by the person who opens and funds it. If that person has tax debt, the IRS may seize the account.

Can I move funds out of a 529 account to protect them from levies?

This may be considered fraud and puts you at risk of a jeopardy levy. You should discuss your options with a tax attorney before making any decisions.

Are college savings accounts safe from the IRS?

College savings accounts aren’t included in the list of assets exempt from seizure. However, if they’re not in the parents’ names and the parents don’t have access to the funds, the IRS might not be able to levy them.

I received a levy notice. What should I do next?

Reach out to a tax attorney immediately. The IRS is actively planning to seize your assets, but you still have time to address your tax debt in a way that fits your budget.

Sources:

https://www.irs.gov/irm/part5/irm_05-011-006
https://www.irs.gov/newsroom/529-plans-questions-and-answers
https://www.irs.gov/taxtopics/tc201
https://www.irs.gov/statistics/collections-activities-penalties-and-appeals
https://www.law.cornell.edu/uscode/text/26/6331
https://www.law.cornell.edu/uscode/text/26/6334
https://www.nerdwallet.com/article/investing/utma-ugma#advantages-and-disadvantages-of-ugma-and-utma-accounts
https://www.hrblock.com/tax-center/wp-content/uploads/2017/06/LETTER-1058.pdf
https://www.irs.gov/individuals/understanding-your-lt11-notice-or-letter-1058