Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Can Pay for Your Child's Private School Tuition Early
Transcript
- Lucas: So, when people think about 529 plans, the immediate association is college savings. Four-year university, maybe graduate school. But here's the thing — the Tax Cuts and Jobs Act of 2017 quietly expanded 529 plans to cover K-12 tuition, up to $10,000 per year per beneficiary. That change took effect in 2018, and a lot of families still don't realize it's an option. Luna: Yeah, I've heard that number tossed around — $10,000 per kid per year for private school. But does that mean you can just write a check from your 529 to the school, no questions asked? Lucas: Essentially, yes. The IRS treats it as a qualified withdrawal, so the earnings portion comes out federal-income-tax-free. But — and this is a big but — state treatment varies. About 30 states conform to the federal rule and allow the same tax-free treatment for K-12 withdrawals. But others, like California, do not. They still treat that withdrawal as a non-qualified distribution, meaning you'd owe state income tax on the earnings plus a penalty. Luna: Wow, that's a huge trap for families who don't check their state rules. So before anyone pulls money out for private school, they need to know if their state conforms? Lucas: Exactly. And it's not just about the withdrawal — it's also about the contribution. Some states offer a state income tax deduction for 529 contributions. If you contribute to your own state's plan, you get that deduction. But if you then use the money for K-12 tuition, you might owe back that deduction if the state doesn't conform. It's a recapture situation in some states. So you really need to run the numbers. Luna: Let me jump in here — if our money conversations have helped you think about a decision differently, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Yeah, that's right. Listener support is what keeps this show ad-free and focused on stuff like this. Just a small gesture goes a long way. Luna: So back to the K-12 angle — there's also the $10,000 annual limit. Is that per child, or per family? Lucas: Per beneficiary, per year. So if you have two kids in private school, you can withdraw up to $10,000 from each of their 529 plans annually. That's $20,000 total, federal-tax-free, assuming your state conforms. But what's interesting is that $10,000 limit applies to tuition only. It doesn't cover room and board, books, or computers for K-12 — just tuition. That's a narrower definition than college, where those other expenses are also qualified. Luna: So it's strictly tuition. That makes sense — but it also means if your private school has fees for textbooks, field trips, or aftercare, those can't come out of the 529. You'd have to pay for those separately. Lucas: Right. And that's where the strategy comes in. If you're going to use a 529 for K-12 tuition, you want to maximize the tax benefit on that $10,000. One approach is to front-load the account early. For example, you can superfund a 529 with up to five years' worth of annual gift tax exclusions in one year — that's $90,000 per beneficiary in 2026, using the $18,000 annual gift exclusion multiplied by five. Luna: Wait, so you could put $90,000 into a 529 for a kindergartener, let it grow tax-free for a few years, then start withdrawing $10,000 a year for private school tuition starting in first grade? Lucas: Exactly. And the growth on that $90,000 over, say, five years, if you're invested in a moderate portfolio, could be substantial. Let's say it grows at an average of 6 percent annually. After five years, you'd have about $120,000. You can then withdraw $10,000 each year for tuition, federal-tax-free, and the earnings portion of those withdrawals is also tax-free. That's a huge advantage over just saving in a taxable account. Luna: But what if you don't end up using all the money for K-12? You could always redirect it to college, right? Lucas: Absolutely. And that's the beauty of a 529 — it's flexible. If your child gets a scholarship or decides not to go to private school, you can change the beneficiary to another family member, or keep the money for college. The earnings are still tax-free for qualified education expenses. The only risk is if you overfund the account and have to take a non-qualified withdrawal, then you'd pay taxes and a 10 percent penalty on the earnings. Luna: So it's basically a 'use it or lose it' in terms of the tax benefit, but only if you withdraw for non-education stuff. And with the K-12 option, you have another way to use the funds earlier than college. That could be really attractive for families who are already saving for college but also want to send their kids to private school. Lucas: Right. Let me give you a concrete example. Say you live in Ohio — Ohio conforms to the federal K-12 rule, so withdrawals for private school tuition are state-tax-free as well. You have a five-year-old starting kindergarten at a private school that costs $12,000 a year. You can use the 529 to pay $10,000 of that tuition each year, and pay the remaining $2,000 out of pocket. Over 13 years of K-12, that's $130,000 in tuition paid from the 529, tax-free. That's significant savings compared to if you had just saved in a taxable account. Luna: And you'd also get the Ohio state income tax deduction on contributions, right? Ohio offers a deduction of up to $4,000 per year per beneficiary for contributions to the Ohio 529 plan. So you could contribute $4,000 each year, get the deduction, and then later withdraw that money plus earnings for tuition — but you have to be careful about recapture if you withdraw for K-12 in the same year you claimed the deduction? Lucas: That's the nuance. In Ohio, if you take a withdrawal for K-12 tuition in the same year you claim a deduction for a contribution, you could face recapture of the deduction. So the strategy is to contribute in one year, let the money sit for at least a year, then withdraw in a later year. That way you avoid recapture. It adds a layer of planning, but it's doable. Luna: So for a family like that, the optimal approach might be to start contributing to the 529 when the child is a baby, let it grow for five or six years, then start withdrawing for K-12. That way, you get the state deduction on contributions, the growth is tax-free, and the withdrawals are tax-free. It's a triple tax benefit. Lucas: Exactly. And you can even coordinate with grandparents. Grandparents can open their own 529 for the grandchild, contribute, and then use those funds for private school tuition. The $10,000 limit applies per beneficiary, not per account, so if the parents have a 529 and the grandparents have a separate one, the total withdrawals across both accounts can't exceed $10,000 per year per child. So you need to coordinate to avoid exceeding the limit. Luna: That's a good point. Overwithdrawing would trigger a non-qualified distribution, and you'd owe taxes on the earnings. So tracking the total is important. How does the IRS track that? Do you report it on your tax return? Lucas: The 529 plan administrator will issue a Form 1099-Q showing the total distributions. The beneficiary's parent or the account owner reports the qualified education expenses on their tax return. For K-12, you just need to show that the tuition was paid to an eligible private school. The school must be an elementary or secondary public, private, or religious school that provides kindergarten through grade 12 education under state law. So most private schools qualify. Luna: What about homeschooling expenses? I've seen some people ask if 529s can cover those. Lucas: No, the IRS specifically excludes homeschooling expenses from qualified K-12 tuition. The Tax Cuts and Jobs Act did not include them. So even if you spend money on curriculum, tutors, or materials for a homeschooled child, that doesn't qualify for a 529 withdrawal. That's a common misconception. Luna: Good to clarify. So it's strictly private school tuition, not any educational expense. Now, what about the timing of the contribution? If you know your child is starting private school in September, can you contribute in August and then withdraw in September for the tuition? Lucas: Technically, yes. There's no minimum holding period for contributions before they can be withdrawn for qualified expenses. But if you're in a state that offers a deduction, you might trigger recapture if you contribute and withdraw in the same tax year. Also, from an investment standpoint, contributing and immediately withdrawing means no growth, so you're not getting the tax-free growth benefit. You'd just be using the 529 as a pass-through. It still saves you state income tax if you get a deduction, but you miss the growth. Luna: So the real power is in contributing early, investing the money, and letting it compound before you need it for tuition. That way, you're not just saving on taxes — you're also earning tax-free returns. Lucas: Right. And the longer the runway, the better. For a child starting kindergarten, you have 13 years of K-12 ahead of you. If you start saving when they're born, you have five years of growth before you even start withdrawals. That's a solid strategy. But you also need to consider the opportunity cost. Money in a 529 is locked in for education. If you think you might need the money for something else, you could be better off in a taxable account or a Roth IRA, which offers more flexibility. Luna: Yeah, the trade-off is that you're giving up liquidity. But for families who are committed to private school, it can be a powerful tool. Let's talk about the $10,000 limit again — is that per child per year, or per child per school year? I'm thinking about families who might have a child starting school in January vs. September. Lucas: It's per calendar year. So if you pay tuition for the spring semester in January 2026, and then for the fall semester in September 2026, that's two separate calendar years, so you could potentially take $10,000 in each year. But if you pay the full year's tuition in September 2026 for the entire school year, you'd only be able to use $10,000 from the 529 for that tax year. So the timing of the payment matters. Luna: That's a great planning point. If you can split the tuition payment across two calendar years, you can double the 529 benefit. But that depends on the school's payment schedule. Some schools require full payment upfront. Lucas: Right. And you can also pair the 529 with other tax-advantaged accounts. For example, if your child has a Coverdell Education Savings Account, you can use that for K-12 expenses as well, and the annual limit for Coverdell is $2,000 per child. But the contributions aren't deductible. So you could potentially use a 529 for the first $10,000 and a Coverdell for the next $2,000, if the school's tuition exceeds $10,000. Just don't double-dip — you can't claim the same expense on both accounts. Luna: So for a family with a $15,000 tuition bill, they could use $10,000 from the 529 and $2,000 from the Coverdell, and pay the remaining $3,000 out of pocket. That's a solid strategy. Lucas: Exactly. And if they have multiple children, they can do the same for each child. The key is to keep good records of which expenses are paid from which account. The IRS requires documentation if you're ever audited. So save tuition receipts, enrollment contracts, and account statements. Luna: Now, what about families who move to a different state? Say you start a 529 in New York, which offers a state deduction, then you move to Texas, which has no state income tax. Does that affect the K-12 withdrawal? Lucas: The withdrawal rules depend on the state where you're filing taxes when you take the distribution. If you move to a state that doesn't conform to the K-12 rule, you might owe state tax on the earnings. But if you move to a state with no income tax, like Texas, then there's no state tax issue. The federal treatment remains the same regardless of where you live. So it's important to check the rules of your current state of residence, not just the state where the 529 plan is based. Luna: Good point. So the planning involves both the state where you open the account and the state where you live when you withdraw. A lot of moving parts. But the core takeaway is that 529 plans aren't just for college anymore — they're a viable option for K-12 private school tuition, with some careful state-by-state analysis. Lucas: Absolutely. And I think the most underutilized aspect is the ability to front-load the account. Many families contribute small amounts over time, but if you have a lump sum available, superfunding a 529 for a young child can generate significant tax-free growth that you can then use for private school. It's like a mini college fund, but for elementary school. Luna: And if the child ends up not going to private school, you still have the money for college. So it's a win-win, as long as you don't overfund it. The risk is minimal if you have multiple children or can change beneficiaries. Lucas: Right. And one more thing — the SECURE Act 2.0, passed in 2022, also allowed 529 funds to be rolled over into a Roth IRA for the beneficiary, up to a lifetime limit of $35,000, provided the 529 has been open for at least 15 years. So if you have leftover funds after college, you can move them to a Roth IRA. That adds even more flexibility. So the 529 is becoming a multi-purpose education savings vehicle. Luna: That's huge. So for a family that saves aggressively in a 529, they have multiple off-ramps: private school tuition, college, graduate school, or even a Roth IRA. The key is to start early and let compounding do the work. Lucas: Exactly. And with K-12 tuition rising faster than inflation in many areas, the $10,000 annual limit might not cover the full cost, but it's a significant tax-free benefit. For families in high-cost cities like New York or San Francisco, where private school tuition can exceed $30,000 a year, that $10,000 tax-free withdrawal can save them thousands in taxes over the child's K-12 career. Luna: Worth noting that some states have higher limits? I think I've heard of a few states that allow more than $10,000 for K-12. Lucas: A few states, like Pennsylvania, allow up to $15,000 per year for K-12 tuition from a 529. But that's the state's own rule — the federal limit is still $10,000. So if you withdraw more than $10,000, the excess would be federally taxable as a non-qualified distribution. But Pennsylvania doesn't tax 529 earnings at all, so the state treatment would be fine. It's a bit of a patchwork. Always check your specific state's rules. Luna: So the bottom line: 529 plans are a viable tool for K-12 private school tuition, but you need to navigate the state-level rules carefully. The federal benefit is solid: tax-free earnings on up to $10,000 per year per child. And by front-loading, you can maximize growth. Lucas: Right. And I think for many families, the decision comes down to whether they're willing to tie up that money for education. If you're confident your child will attend private school or college, a 529 is a no-brainer. If you're less certain, maybe start with a smaller contribution and increase it as you get clarity. But the flexibility added by the K-12 option and the Roth rollover makes it more attractive than ever. Luna: Great episode, Lucas. I think we gave listeners a concrete strategy to consider. Thanks for tuning in, everyone.