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: So Luna, I just got the tuition notice from my son's private school — almost eighteen thousand dollars for next year. And it got me thinking: how many parents realize they can actually use a 529 plan to pay for K-through-12 tuition, not just college? Luna: Wait, I thought 529s were strictly for higher education. When did that change? Lucas: It was part of the Tax Cuts and Jobs Act back in 2017. The law expanded the definition of qualified expenses to include tuition at elementary and secondary schools — both public and private — up to ten thousand dollars per year, per beneficiary. Luna: So that's federal. But I bet some states don't go along with it? Lucas: Exactly. And this is where it gets tricky. For federal tax purposes, a K-through-12 withdrawal is qualified — earnings come out tax-free. But about a dozen states still treat those withdrawals as non-qualified for their own income tax purposes. So if you claimed a state deduction on contributions, you might have to recapture it. Luna: Which states? I've heard California and New York are strict. Lucas: Yeah, California and New Jersey are two big ones that never conformed. New York actually did conform, but with some nuances. The point is, you have to check your own state's rules. The ten thousand dollar limit is per beneficiary, not per account, so if you have multiple kids, each can get that amount. Luna: So if I have a child in private school, I could pay ten grand from a 529 and then cover the rest from other funds. But is there a downside? I mean, that's money not growing for college. Lucas: That's the classic trade-off. You're sacrificing future tax-free growth for current savings. But if you're already maxing out other college savings or if the private school tuition is a real strain, using the 529 can give you an immediate tax benefit — at least at the federal level. Luna: And what about the state deduction? Some states give you a deduction on contributions regardless of how they're used later. Lucas: Right, and that's actually a smart strategy: contribute enough to get the maximum state deduction, then use those same dollars for K-through-12 the same year. You get the deduction on the way in and tax-free withdrawal on the way out — as long as your state conforms to the federal rule. Luna: Okay, that makes sense. But honestly, if this is helping you sort through the details, I gotta say — Lucas: Yeah, go ahead. Luna: If today's conversation saved you a headache or a penalty down the road, that's exactly why we do this. And you know what, if it was worth a coffee to you, there's a link — buy me a coffee dot com slash fexingo. Seriously, listener support keeps this show ad-free and focused on the details. Lucas: Yeah, it's a tiny ask for the kind of detail we try to pack in. So back to the nuts and bolts — there's another layer: the a b c d test for 529 plans. You can also use a 529 for certain other K-through-12 expenses beyond tuition? No. The law specifically only covers tuition, not room and board, not computers, not uniforms. Luna: So if my kid goes to a boarding school for high school, can I use a 529 for room and board there? Lucas: Actually, yes — but only for tuition. Room and board at a K-through-12 boarding school is not a qualified expense under current law. That's different from college, where room and board is covered up to the school's cost of attendance. Luna: Good to know. So the ten grand is strictly for tuition. What about prepaid tuition plans? I know some states have prepaid 529 plans for in-state public colleges. Lucas: Those are mainly for college. But some private school tuition prepayment programs exist outside of 529s. They're rare and not tax-advantaged. So if you're looking for tax benefits, a regular 529 savings plan is your best bet. Luna: What if grandparents want to contribute to a grandchild's private school tuition? Can they open a 529? Lucas: Absolutely. Anyone can open a 529 for a beneficiary. But a big caution: if the grandparent owns the account, it can affect financial aid for college later — because distributions from grandparent-owned 529s are counted as untaxed income to the student. So if college aid is a concern, consider a parent-owned account instead. Luna: And if the child gets a scholarship for private school? Does that trigger the penalty exception like it does for college? Lucas: No special exception for K-through-12 scholarships. The scholarship exception — where you can withdraw earnings without the 10 percent penalty but still pay income tax — only applies to higher education scholarships. So if your child gets a scholarship to a private elementary school, you'd still face the penalty on any earnings if you withdraw extra funds. Luna: That's a sneaky trap. So the safest approach is to only contribute what you're sure you'll use for tuition within a year or two. Lucas: Exactly. And remember, you can change beneficiaries freely within the family. So if one child doesn't use the K-through-12 funds, you can roll them to a sibling or even to yourself for college. That flexibility is a big advantage over Coverdell ESAs. Luna: Coverdell ESAs also allow K-through-12 expenses, but with much lower contribution limits — only two thousand per year. And they have income phaseouts. Lucas: Right. So for most families, a 529 is more generous and flexible. But the choice depends on your income and state tax situation. One more thing: if you live in a state with a state income tax, you might be able to deduct your 529 contributions. But if you use those dollars for K-through-12 in a non-conforming state, you might have to add that deduction back as income later. So state tax form instructions are your friend. Luna: State tax forms — the exciting reading no one does. But worth it. So the big takeaway: 529s can cover up to ten thousand a year in K-through-12 tuition, but check state conformity first. Lucas: Exactly. And the ten thousand is per beneficiary per year, not per account. So if you have twins, you can do twenty thousand across two accounts. Also, the limit is per student, not per family, so if you have one child attending both public school part-time and private school part-time — unlikely, but the rule is per beneficiary. Luna: What if the private school has multiple components? Like tuition plus a mandatory technology fee? Lucas: The IRS says tuition is strictly the charge for enrollment. Fees for books, computers, or activities are not qualified. But some schools bundle everything into one tuition figure. In that case, the entire amount might be considered tuition — it depends on how the school itemizes it. If in doubt, ask the school for a breakdown. Luna: Good strategy. So bottom line: if you're paying for private school, a 529 can help, but don't overfund it solely for K-through-12. Keep college in mind. Lucas: Right. The average private school tuition is around twelve thousand a year nationally, so ten thousand from a 529 covers a big chunk. For high-cost private schools like in New York City, it's a smaller percentage, but still significant. And if you have multiple kids, the benefits compound. Luna: One last question: does the ten thousand apply per parent or per student? Can two parents each contribute to their own 529 for the same child? Lucas: The limit is per beneficiary, not per account or per contributor. So even if Mom and Dad each have a 529 for the same child, the total qualified withdrawal for K-through-12 tuition across all accounts cannot exceed ten thousand per year. Otherwise, the excess is non-qualified. Luna: That coordinates with the rule for multiple accounts. Good. Alright, I think we've covered the key points. For anyone considering private school, this is a solid option. Lucas: Yeah, and I'll leave listeners with this: before you write that tuition check, ask yourself if you have a 529 account with money that could be working for you. Even if you only save the state tax deduction, it's worth a look. For next time, we'll tackle how to handle 529 plans when your child decides not to go to college at all.