Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using 529 Plans for K-12 Private School Tuition
Transcript
- Lucas: You know, when most people hear '529 plan,' they immediately think college — tuition, room and board, maybe a laptop. But there's a lesser-known provision that's been on the books since 2018: you can use a 529 plan to pay for K through 12 private school tuition. Luna: Right, the Tax Cuts and Jobs Act expanded qualified expenses to include elementary and secondary school tuition. But I think a lot of families still don't realize it applies. Lucas: Exactly. So the rule is: you can withdraw up to $10,000 per year, per beneficiary, for tuition at a private, religious, or public school — though public school tuition is rare. That's $10,000 total from all 529 plans for that child, per year. Luna: And that $10,000 cap is per beneficiary, not per account. So if a grandparent has a 529 and a parent has one, combined they can only pull $10,000 annually for that child's K-12 tuition. Lucas: Right. And crucially, it's only for tuition — not for room and board, not for books, not for computers at the K-12 level. That's a key difference from college expenses. So if you're paying for private school, you can cover the tuition piece with a 529, but not the after-school program or the field trip fees. Luna: So the practical question becomes: is it worth it? If you're already in a high-tax state, the state tax deduction on contributions could make this a no-brainer, right? Lucas: That's exactly the calculation. Let's say you live in New York, which offers a state income tax deduction of up to $5,000 for single filers, $10,000 for joint filers, on 529 contributions. If you're in the top bracket — around 8.8 percent — that's a potential savings of $880 per year. Over five years of elementary school, that's nearly $4,400. Luna: But you have to be careful: some states, like New York, recapture the deduction if you later use the money for a non-qualified withdrawal. So if you pull the money out for K-12 tuition, that's fine — it's qualified. But if you overfund and later withdraw for non-education, you could owe back those state tax benefits. Lucas: Great point. And that's actually a risk: if you start a 529 planning to use it for private elementary school, but then your child switches to public school in middle school, you might have more money than you need for college. It's a good problem to have, but it's worth modeling the numbers upfront. Luna: So what's the alternative if you're not sure about the K-12 route? Maybe a Coverdell Education Savings Account? That also allows K-12 expenses, but with a much lower contribution limit — $2,000 per year. Lucas: Right, and the Coverdell has income phaseouts that cut off higher earners. A 529 has much higher contribution limits — often $300,000 to $500,000 per beneficiary — and no income limits. So for families with higher incomes, the 529 is really the only game in town for tax-advantaged K-12 savings. Luna: Let's talk about a concrete example. Say a family in Illinois — state income tax flat rate 4.95 percent — wants to contribute $10,000 a year to a 529 for their daughter's private high school. That saves them $495 per year in state taxes. Over four years, that's almost $2,000. Lucas: And if they invest that $10,000 in a growth-oriented portfolio within the 529, any earnings used for tuition are tax-free federally and at the state level in most states. So you're getting both a tax deduction on the way in and tax-free growth on the way out — as long as the money goes to tuition. Luna: But what about the federal tax deduction? There isn't one, right? The federal benefit is just the tax-free growth and withdrawals. Lucas: Correct. No federal deduction on contributions. So the state tax benefit is the main immediate incentive. And about a third of states don't offer any deduction at all — California, Delaware, Hawaii, Kentucky, Maine, and a few others. In those states, the only benefit is the tax-free growth, which is still meaningful over time. Luna: Let's also think about the trade-off: if you use 529 funds for K-12, that money isn't growing for college anymore. Could that hurt you later? Lucas: Absolutely. Every dollar you pull out for high school tuition is a dollar that won't compound for another six or seven years before college. So you need to decide: is the state tax savings now worth the potential lost growth? For families who max out other retirement savings and have extra cash, it might be. For others, the opportunity cost could be significant. Luna: And there's a timing issue: you can only withdraw for the current year's tuition. You can't front-load multiple years in one withdrawal, even if you pay the school in advance. Lucas: Right. The IRS says the withdrawal must be in the same tax year as the tuition payment. So if you pay for spring semester in December, you need to take the 529 distribution in that same calendar year. It's a coordination game, but manageable. Luna: One more thing: if grandparents are contributing to a 529 for a grandchild and the parents claim the child as a dependent, the grandparent's 529 assets can affect financial aid for college. But for K-12, financial aid isn't an issue, so that's less of a concern. Lucas: True. And there's also the generation-skipping transfer tax angle for very large contributions from grandparents. But that's a niche concern for ultra-high-net-worth families. For most people, the simplicity of a 529 for K-12 is appealing. Luna: So bottom line: if you live in a state with a 529 tax deduction, you're paying private school tuition anyway, and you have the cash flow, using a 529 can save you a few hundred to a few thousand dollars over the K-12 years. But if you're in a no-deduction state, the benefit is smaller and you need to weigh it against potential lost college growth. Lucas: Exactly. And as with any 529 strategy, don't overfund. You can always change the beneficiary to another family member, but if you have no one else, the penalty on non-qualified earnings is 10 percent plus regular income tax. So match your contributions to your expected tuition needs. Luna: And if your child ends up getting a scholarship, you can withdraw up to the scholarship amount penalty-free, though you still owe income tax on the earnings. So there's some flexibility. Lucas: Coming up, we'll talk about how to coordinate a 529 with other savings vehicles like custodial accounts. But first, if this conversation has helped you think about your own education savings strategy, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's the smallest way to keep the show ad-free and independent. Luna: Yeah, listener support makes a real difference. It's what keeps these conversations going without sponsors pushing products. Lucas: Appreciate it. So, coordination with a custodial account under the Uniform Transfers to Minors Act, or UTMA — how does that interact with a 529 used for K-12? Luna: Right, if you have a UTMA account, the assets are owned by the child, and they can be used for any purpose that benefits the child — including private school tuition. But the key difference is taxation: UTMA earnings are taxed to the child, often at a lower rate, but once the child reaches the age of majority, the money is theirs to spend as they wish. Lucas: Whereas a 529 remains under the account owner's control. So if you're worried about your 18-year-old using a UTMA for something other than education, the 529 gives you more control. Plus, the 529 has the potential for tax-free growth if used for qualified expenses. Luna: So the strategy might be: use the 529 for the tax benefit on contributions and growth, and use the UTMA for any non-tuition expenses like books or computers that aren't covered under the K-12 529 rules. Lucas: Exactly. And keep in mind that for college, the 529 covers a much broader set of expenses. So you could use the 529 for K-12 tuition now, then refocus it on college later. Just be careful not to drain it so much that you shortchange college. Luna: One last thought: some states have their own nuances. For example, some states limit the K-12 tuition benefit to only private schools, others include public school tuition if it's charged. And a few states don't conform to the federal rule at all, meaning the withdrawal might be state-taxable even if it's federally qualified. Lucas: Great catch. So before you pull the trigger, check your state's specific rules. The College Savings Plans Network has a good state-by-state comparison. It's worth the five minutes to avoid a surprise on your state tax return. Luna: And we should note that this episode is for informational purposes, not tax advice. Always consult a professional for your specific situation. Lucas: Absolutely. But if you are paying for private school and live in a state with a decent 529 deduction, it's worth running the numbers. For us, that's the episode — hope it gave you something to think about.