Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using a 529 Plan to Pay for Your Child's Boarding School
Transcript
- Lucas: So let's say your child gets into Phillips Exeter Academy — one of the top boarding schools in the country. Tuition, room, and board: around sixty-five thousand dollars a year. And you're thinking, can I use my 529 plan to pay for this? Luna: That's a question I get a lot from listeners with middle schoolers. The short answer is yes — but there's a big catch. Lucas: Right, the ten thousand dollar annual limit per beneficiary for K-12 tuition. That's federal law, from the Tax Cuts and Jobs Act of 2017. So you can only pull ten grand out of the 529 per child per year for private school tuition — and that includes boarding school. Luna: But sixty-five thousand dollars in tuition — ten thousand barely covers two months. And what about the room and board piece? Is that included? Lucas: Great question. The ten thousand dollar limit applies only to tuition. Room and board at a boarding school — that's a qualified expense separately. So you could actually pay more than ten thousand total, as long as the extra is for room and board. But the IRS hasn't issued super clear guidance, which makes people nervous. Lucas: Most financial advisors I've talked to say if the school provides a single bill that bundles tuition and room and board, you can treat the room and board portion as a qualified expense without counting toward the ten thousand dollar tuition limit. But you need to keep good records. Luna: So you're saying a family could potentially pay, say, fifteen thousand from the 529 — ten for tuition, five for room and board — and that's fine? Lucas: Exactly. And if you have multiple children, each one gets their own ten thousand dollar tuition limit. So if you've got two kids at the same boarding school, that's twenty thousand in tuition coverage per year. Still a fraction of the total cost, but it's something. Lucas: And honestly, if today's conversation helped you think through your own family's education funding, that's exactly why we keep this show ad-free. If it was worth a coffee to you, you can find that link — buy me a coffee dot com slash fexingo. It's just a small way listeners keep us going. Luna: Yeah, it really does make a difference. And we appreciate it. Now — back to boarding school. One thing I want to point out: state tax treatment varies. Some states, like New York, allow a deduction for 529 contributions, but they might recapture that deduction if you use the money for K-12 instead of college. Lucas: That's a critical point. Over thirty states offer a state income tax deduction or credit for 529 contributions. But about a dozen of those — including New York, Michigan, and Oregon — will claw back the deduction if you use the funds for K-12 tuition. So you could end up owing state taxes on those contributions. Luna: So before anyone writes that check to Exeter or Andover, they should check their own state's rules. Because that clawback could really sting. Lucas: Absolutely. Let's look at a concrete example. Say you live in New York and you contribute ten thousand dollars to a 529 for your daughter. You deduct that from your state taxes, saving maybe six to seven hundred dollars depending on your bracket. Then you use that same ten thousand for her boarding school tuition. New York recaptures the full deduction, so you owe that six to seven hundred back. Luna: Which basically wipes out any state tax benefit. So for families in those states, the 529 still makes sense for the federal tax-free growth, but the state benefit is gone. Lucas: Right. And then there's the question of timing. If you're paying for boarding school during the same years you're saving for college, you have to be strategic. Every dollar you pull out for high school is a dollar that's not growing for college. Lucas: I worked with a family last year — they had about a hundred thousand in a 529 for their son. They used ten thousand a year for his boarding school, and by the time he graduated high school, they'd pulled out forty thousand. The account had grown to about seventy-five thousand during that time because of market gains. But they missed out on growth on that forty thousand. Luna: So the opportunity cost is real. If they'd left that forty thousand in the market, it might have been worth fifty-five or sixty thousand by college. Instead, it paid for high school. Lucas: Exactly. So the decision to use a 529 for boarding school really depends on your overall savings picture. If you're already on track to fully fund college, then using some of the 529 for K-12 makes sense. But if you're behind on college savings, you might want to leave the 529 alone and pay for boarding school out of pocket or through other means. Luna: What about the argument that boarding school itself can improve college admissions chances, potentially leading to merit scholarships? Does that change the math? Lucas: It can. A lot of top boarding schools have strong college counseling programs and feeder relationships. The percentage of students going to Ivy-plus schools is significantly higher from places like Exeter, St. Paul's, or Deerfield. But that's a bet — and an expensive one. The sixty-five-thousand-dollar tuition doesn't guarantee anything. Lucas: I'd frame it this way: if you're already committed to boarding school for other reasons — academics, athletics, social environment — then the 529 is a useful tool to cover part of the cost. But don't decide to send your child to boarding school just because you can use a 529. Luna: That's a really important distinction. And on the practical side, how do you actually get the money out? Do you need to provide receipts to the 529 administrator? Lucas: You don't submit receipts upfront, but you need to keep them. The 529 plan will issue a Form 1099-Q showing your distributions, and you report those on your tax return. If the IRS ever audits, you'll need to prove the money went to qualified expenses. So keep tuition bills, room and board invoices, and proof of payment. Luna: And what about computers, textbooks, other supplies? Those are qualified for college — are they qualified for K-12? Lucas: No. For K-12, qualified expenses are limited to tuition, room and board, academic fees, and certain special needs services. Computers and software are not qualified for elementary or secondary school. That's a common mistake people make. Lucas: One more thing: if you're paying for boarding school and also have a younger child in a private elementary school, each beneficiary gets their own ten thousand dollar limit. So you could potentially use twenty thousand total if you have two kids. Luna: So the ten thousand dollar limit is per beneficiary, not per family or per account. That's good to know. Lucas: Right. And one strategy some families use: if you have a 529 with a large balance and you want to use more than ten thousand for one child's boarding school, you could change the beneficiary to a different child or even to yourself for a period. But that gets complicated and has gift tax implications. Luna: I'd advise against that unless you're working with a tax professional. It's easy to make a mistake. Lucas: Agreed. So let's recap: 529 plans can cover K-12 tuition up to ten thousand per year per beneficiary. Room and board is a separate qualified expense. Watch out for state clawback rules. And weigh the opportunity cost against college savings goals. Luna: And always keep your receipts. That's the boring but essential advice. Lucas: Exactly. Next week we'll look at another niche use for 529s — stay tuned.