Under a new federal law, contributions made to a 529 savings account for a child, grandchild, stepchild, or step-grandchild more than two years before filing a bankruptcy petition are protected from creditors. That’s true to the extent the contributions do not exceed the amounts permitted by the specific 529 plan. Funds contributed to a 529 plan more than 365 days but less than 720 days before filing bankruptcy are protected up to $5,000 per beneficiary.
What’s more, this is an exclusion from bankruptcy, not an exemption. As an exclusion, qualified 529 accounts enjoy protection under state as well as federal law.
Despite this language in the new law, transfers to 529 plans could still be disregarded if they are fraudulent transfers. That would be the case if the debtor made such transfer with the intent to hinder, delay, or defraud any pre-existing or subsequent creditor. In such a situation, the money in a 529 plan would be exposed to bankruptcy creditors, no matter how much time has elapsed.
