Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / 529 Plans and K-12 Private School Tuition Expenses
Transcript
- Lucas: So Luna, I want to talk about something that a lot of families don't realize their 529 plan can do: pay for private school tuition — not college, but K through 12. Luna: Wait, really? I thought 529s were strictly for higher education. When did that change? Lucas: It changed with the Tax Cuts and Jobs Act of 2017. That law expanded 529 plans to cover up to ten thousand dollars per year, per child, for tuition at elementary and secondary schools — public, private, or religious. Luna: So that means if you're paying, say, fifteen thousand a year for private school, you can funnel ten thousand through a 529 and get the tax benefits. Lucas: Exactly. And the key is that the money grows tax-deferred, and withdrawals for qualified expenses — including that K through 12 tuition — are tax-free at the federal level. State treatment varies, which we'll get into. Luna: Let's talk about the cap. It's ten thousand per year per beneficiary, right? So if you have two kids in private school, you could take out twenty thousand total, ten for each. Lucas: Right. The limit applies per student, per year. And it's only for tuition — not for room and board, not for computers, not for textbooks at the K through 12 level. Those expenses are still limited to higher education. Luna: That's an important distinction. So if you're thinking of using the 529 to cover private school fees or uniforms, that won't fly. Lucas: Correct. The IRS has been pretty clear: only tuition is a qualified K through 12 expense. But for many families, tuition is the biggest line item anyway. Luna: What about state tax treatment? That's where it gets tricky, right? Lucas: Very. Most states conform to the federal rules, but some don't. For example, in 2026, about thirty-five states allow the state tax deduction or credit for contributions used for K through 12 tuition. But a few states — like California and New Jersey — never adopted the federal expansion. So if you live there, a withdrawal for private school tuition would be state-taxable, and you might even owe a state penalty. Luna: Ouch. So before you start using a 529 for private school, you need to check your state's rules. Lucas: Absolutely. And even in states that do conform, some have their own limits. For instance, New York allows the deduction for contributions up to five thousand dollars per year for single filers, ten thousand for joint. But if you withdraw for K through 12 tuition, they recapture the deduction if you don't leave the money in the account for a certain period. Luna: So you could end up paying back the tax benefit. That's a trap to watch for. Lucas: Right. But for many families, the federal tax-free growth still makes it worthwhile. Let me give you a concrete example. Say you start contributing to a 529 when your child is born, and by the time they enter kindergarten, you've built up fifty thousand dollars. You then use ten thousand each year for private school tuition through twelfth grade. That's thirteen years of withdrawals, totaling one hundred thirty thousand. The earnings portion of those withdrawals would have been taxed as ordinary income if you'd kept the money in a taxable account. Luna: And you avoid that tax. Plus, if your state offers a deduction on contributions, you get a bonus. Lucas: Exactly. But there's a potential downside: if you overfund the account and don't use all the money for education, you could face penalties. The earnings on non-qualified withdrawals are taxed at your ordinary rate plus a ten percent penalty. Luna: So you need to be careful not to put in too much. Especially if you're planning to use the 529 for private school early, you might have less time for the money to grow, which reduces the risk of overfunding but also reduces the tax benefit. Lucas: That's a good point. The earlier you start, the more growth you get, but also the more you need to estimate future costs. One strategy is to contribute aggressively in the early years and then stop once you've reached a target. Or you can use a Coverdell ESA alongside a 529, since Coverdells also cover K through 12 expenses, including some non-tuition costs like computers and tutoring. Luna: But Coverdells have a much lower contribution limit — two thousand dollars per year per beneficiary. So they're not a substitute for a 529 for big tuition bills. Lucas: Right. They're more of a supplement. Now, another thing to consider is that using a 529 for private school reduces the amount available for college. So you have to decide whether the near-term benefit of private school outweighs the long-term college savings. Luna: That's a personal decision. But for families who are already planning to send their kids to private school, using a 529 seems like a no-brainer — at least up to the cap. Lucas: I agree. And the flexibility is huge. If your child ends up going to public school or gets a scholarship, you can change the beneficiary to another child, or even to yourself for graduate courses. Or, as of 2024, you can roll over up to thirty-five thousand dollars from a 529 into a Roth IRA for the beneficiary, subject to certain rules. Luna: That's a great escape hatch. So even if you overfund a bit, you have options. Lucas: Exactly. But let's be real: the Roth rollover is limited to the lifetime cap of thirty-five thousand, and it's subject to the beneficiary having earned income and the 529 being open for at least fifteen years. So it's not a cure-all. Luna: Still, it's better than a penalty. Speaking of penalties, I want to share a cautionary tale. A friend of mine in California — where the state doesn't conform — used her 529 to pay for her son's private high school tuition. She didn't realize California would treat the withdrawal as non-qualified. She ended up owing state income tax plus a two-point-five percent state penalty on the earnings. That wiped out a lot of the benefit. Lucas: That's a perfect example of why you need to check your state's rules. But if you're in a state that conforms, the math works well. For instance, in New York, a family contributing ten thousand dollars per year and taking a state deduction of up to ten thousand for joint filers could save around eight hundred dollars in state income tax annually. Over thirteen years, that's over ten thousand dollars in tax savings. Luna: And that's not even counting the federal tax-free growth. So for families in those states, a 529 for private school is a powerful tool. Lucas: Exactly. And I think that's the key takeaway: know your state's rules, don't exceed the ten thousand per year per child cap, and be realistic about how much you'll need for college. If you do all that, a 529 can be a great way to fund K through 12 private school education. Luna: Before we wrap up, I want to mention something that's been on my mind. We talk a lot about saving and investing on this show, and I know our listeners appreciate that we keep the podcast free and accessible. Lucas: Yeah, that's important to us. And we're able to do that because of listeners who support the show. If you find these episodes helpful, you can help keep them going. Luna: Exactly. There's a simple way to do it: buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Lucas: No pressure at all. But every little bit helps us keep researching topics like this and bringing you practical, actionable information. And we really appreciate it. Luna: Alright, back to the topic. So Lucas, what's one mistake families commonly make when using a 529 for K through 12? Lucas: The biggest one is assuming all private school expenses are qualified. I've seen people try to pay for transportation, field trips, or even the school's annual fundraiser. None of that counts. Only tuition. Luna: So keep good records, and make sure you only withdraw for tuition. The IRS could ask for documentation. Lucas: Right. And if you're audited, you'll need a receipt from the school showing the tuition payment. So save those statements. Luna: Great advice. Any final thoughts? Lucas: Just that the ten thousand dollar cap is per beneficiary, not per account. So if you have multiple 529s for the same child, the total withdrawals for K through 12 tuition can't exceed ten thousand per year. Also, remember that the cap is per year, not per school. So if your child switches schools mid-year, you're still limited to ten thousand total. Luna: Got it. Well, thanks for clarifying all that. I think a lot of our listeners will find this useful. Lucas: Happy to help. And as always, consult a tax professional for your specific situation, because state rules can be complex. Luna: Absolutely. Thanks, Lucas. Lucas: Thanks, Luna. Talk to everyone next time.