Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / 529 Plans Cover Your Childs K-12 Tuition at Private Schools
Transcript
- Lucas: If you're paying for private K-12 tuition right now, and you don't have a 529 plan set up, you are almost certainly leaving money on the table. Luna: That is a strong statement. Walk me through it — I thought 529s were for college. Lucas: That was the old rule. But the Tax Cuts and Jobs Act of 2017 expanded 529s to cover up to ten thousand dollars per year, per beneficiary, for K-12 tuition at public, private, or religious schools. That's been law for almost nine years now, and I still meet families who have no idea. Luna: So they're leaving money on the table — how exactly? Lucas: Two big ways. First, if your state offers a tax deduction for 529 contributions — and over thirty states do — you can contribute to the plan, then withdraw the same money to pay tuition, and that contribution lowers your state taxable income. Let me give you a concrete example. Luna: Please do. Lucas: Say you live in Illinois. You pay fifteen thousand dollars a year in private school tuition. You open an Illinois Bright Start 529 account, contribute ten thousand dollars, then immediately withdraw that ten thousand to pay the school. Illinois lets you deduct up to ten thousand dollars per beneficiary per year from state income tax. At a flat 4.95 percent rate, that saves you roughly four hundred and ninety-five dollars on your state tax return. Almost five hundred bucks for paperwork. Luna: Okay, that's the state tax play. What's the second way? Lucas: The second is investment growth. You don't have to use the money the same year you contribute. If you start early — say when your child enters kindergarten — you can contribute and invest the funds, let them grow tax-free, and withdraw for tuition in later years. Even conservative bond funds have returned two to three percent annually over the past decade. That's tax-free compounding on money you were going to spend anyway. Luna: But there's a catch, right? Withdrawals have to be for the same beneficiary, and the ten thousand dollar cap is per year, per child. Lucas: Exactly. And the cap is per beneficiary, not per account. So if you have two kids in private school, you can do ten thousand per kid per year. That's twenty thousand total in qualified withdrawals annually per family. But note: the ten thousand limit is per year — you can't carry over unused amounts from prior years. Luna: What about families in states with no income tax, like Texas or Florida? Does the 529 still help them? Lucas: Absolutely. They don't get the state tax deduction, but they still get the federal tax-free growth and withdrawals. Plus, they can choose a 529 plan from any state. So if Texas has a mediocre plan, they can open a Nevada plan run by Vanguard or a Utah My529 plan with low fees. The growth is federal tax-free regardless. Luna: That's the part people forget — you're not locked into your own state's plan. Though some states do claw back the deduction if you roll money out. Lucas: Right, but if you're contributing and withdrawing in the same year for tuition, there's nothing to roll. You just need to make sure the withdrawal is coded as a qualified K-12 expense. The 529 provider will ask for the school's name and the amount. Keep the receipt, obviously. Luna: So practically, let's say I'm a parent with a kindergartner at a private school that costs twelve thousand a year. What's the optimal move? Lucas: I'd contribute ten thousand to a 529 in your state if it offers a deduction, then withdraw it immediately to pay the first ten thousand of tuition. Pay the remaining two thousand out of pocket. Do that every year. If your state offers a deduction and you're in a mid-to-high tax bracket, you're saving hundreds annually with zero market risk because the money isn't invested long enough to lose value. Luna: What about families who want to layer this with college savings? Can you use the same 529 account for both K-12 and college? Lucas: Yes, one account per child can handle both. But you need to track the withdrawal types separately for tax purposes. The 1099-Q form your plan sends will show the distribution, and you'll report it on your federal return. The key is that the K-12 withdrawal must be for tuition only — not for room and board, not for books. Just tuition. Luna: And if you take out more than the qualified expenses, you owe tax and a 10 percent penalty on the earnings portion. Lucas: Right. So don't over-withdraw. If tuition is ten thousand exactly, withdraw ten thousand. If it's nine five, withdraw nine five. The penalty is only on earnings, not on the contribution portion, but still — it's a headache you don't want. Luna: I want to dig into state deductions a bit more. A lot of states have caps that are lower than ten thousand. For example, Michigan caps at five thousand per beneficiary per year. So you only get a deduction on half. Lucas: True. But if you have two parents or two accounts, some states let each parent deduct separately. You'd need to check your specific state rules. Also, about a dozen states don't offer any deduction at all — California, Delaware, Kentucky, Massachusetts, New Jersey, and others. In those states, you're still getting federal tax-free growth, but the immediate tax arbitrage isn't there. Luna: For those families, would you still recommend using a 529 for K-12, or just pay out of pocket? Lucas: Depends on the time horizon. If you're in a no-deduction state and you're paying for a high schooler — only a few years left — the tax-free growth benefit is minimal. Might not be worth the paperwork. But if you're starting in kindergarten, you have 13 years of potential growth on that ten thousand dollars. Even at three percent, that's about four thousand in tax-free earnings by senior year. That's real money. Luna: And you can invest the contributions in age-based portfolios that automatically become more conservative as the child ages. Lucas: Exactly. Most good 529 plans offer age-based options. But if you're using the K-12 withdrawal feature, you might want a more conservative allocation since you'll be drawing down sooner. Some people just use a money market or stable value fund for the K-12 portion to avoid market volatility. Luna: One more nuance: what about the federal gift tax annual exclusion? Contributions to a 529 are considered gifts. The annual exclusion in 2026 is eighteen thousand dollars per donor per beneficiary. So if you contribute ten thousand for tuition, that's well under the limit. No gift tax filing needed. Lucas: And you can also superfund — contribute up to five years' worth of gifts at once, which is ninety thousand dollars per donor in 2026. But that's more relevant for college savings, not year-to-year K-12 tuition. Luna: Alright, so the bottom line: if you're paying private school tuition and your state offers a deduction, you should almost certainly use a 529. If your state doesn't, consider it if your child is young enough to benefit from tax-free growth. Lucas: And keep in mind, the ten thousand dollar cap is per beneficiary, not per account. So if you have multiple children, you can set up separate accounts and get the benefit for each. Luna: We've talked a lot about the mechanics. Let me ask you: have you ever seen someone mess this up in a way that cost them? Lucas: I have. The most common mistake is withdrawing for non-tuition K-12 expenses, like a laptop or a school trip. Those don't qualify. Only tuition. I've also seen people forget to keep records — the IRS can ask for proof of the tuition payment. And the second-biggest mistake is contributing to a 529 in a state that doesn't allow the deduction, when they could have used another state's plan with lower fees. Luna: Worth noting: if you already have a 529 for college, you can use the same account for K-12, but you need to designate the withdrawal type carefully. Some plan interfaces have a specific checkbox for K-12 tuition. Lucas: Most do now. It's been eight years since the law changed, so the providers have updated their systems. But always double-check. A few minutes of diligence can save you thousands over a child's school career. Luna: Alright, I'm sold. Let's talk about some plans that are particularly good for this strategy. What are your top picks? Lucas: For state deduction, you want your home state's plan if it offers one. If you're in a no-deduction state, I like the Utah My529 plan — it has a low expense ratio of about 0.13 percent. The Nevada Vanguard 529 is also excellent, with access to Vanguard index funds. And New York's 529 Direct Plan has fees under 0.15 percent and a low minimum. Luna: But you mentioned earlier that the plan selection doesn't affect the K-12 withdrawal rules — those are federal. So really, it's about fees and investment options. Lucas: Exactly. The tax treatment is the same regardless of which state's plan you use. So shop around. And if your state's plan has high fees, don't feel obligated to use it unless you need the deduction. Luna: Great point. Before we wrap, I want to circle back to something you said at the top — about leaving money on the table. Can you give us a rough estimate of how much a typical family might save over a child's entire K-12 career by using a 529? Lucas: Sure. Let's assume a family in a state with a 5 percent income tax, contributing the full ten thousand each year for 13 years from kindergarten through 12th grade. That's a hundred and thirty thousand in contributions. The state tax savings alone would be about six thousand five hundred dollars. If they invest the contributions early and earn a conservative 3 percent, they'd have about fifteen thousand in tax-free earnings over the period. Total benefit: around twenty-one thousand five hundred dollars — tax-free. That's not chump change. Luna: That's a powerful number. And it's not dependent on stock market returns — the state tax savings alone are a guaranteed return. Lucas: Exactly. That's why I say it's a no-brainer for families in deduction states. For others, it's still worth considering, especially with a longer time horizon. Luna: Alright, I think we've covered the key points. Let's remind listeners: the 529 K-12 provision is permanent federal law, so you can plan for the long haul. Lucas: Yes, it doesn't expire. And one more thing — if you're already using a 529 for college and your child decides not to go to college, you can change the beneficiary to another family member without penalty. So there's flexibility. Luna: That's a good safety net. And if you have a child with special needs, there's also the ABLE account option, but that's a topic for another episode. Lucas: Definitely. For now, if you're paying private K-12 tuition, check your state's 529 rules, open an account, and start saving on taxes. It's one of the simplest moves in personal finance. Luna: And if you found this episode useful, consider supporting the show. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it really does make a difference. We keep the podcast ad-free, and listener support is a big part of that. So thanks to anyone who chips in. Luna: Now back to the numbers — next week we're going to tackle using 529s for apprenticeship programs, which is another underused feature. Lucas: Perfect. Until then, if you have a K-12 tuition bill, get that 529 working for you.