Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / 529 Plan Rules for K-12 Tuition and Expenses
Transcript
- Lucas: So Luna, I was talking to a friend last weekend, and she mentioned she's using her 529 plan to pay for her daughter's private high school tuition. And I thought, right, that's a thing, but a lot of people still don't realize 529s aren't just for college anymore. Luna: It's true. The rules changed a few years back, but I bet most parents with young kids haven't connected the dots. So what's the actual deal? Lucas: So the big change came with the Tax Cuts and Jobs Act, effective for distributions after 2017. That's when the IRS started allowing 529 funds to be used for K-12 tuition at public, private, or religious schools, up to ten thousand dollars per year, per beneficiary. And that's just the federal rule. Luna: Per year, per kid. And that's just tuition, right? Not books or room and board for high school? Lucas: Exactly. The K-12 allowance is strictly for tuition. So if you're paying for a laptop or a school trip, those are not qualified expenses at the K-12 level. You'd have to use other funds. But for college, you can use 529 money for a broader set of expenses, including room and board, which we've covered in previous episodes. Luna: So for K-12, it's just tuition. And that ten grand limit is per student per year. What happens if you have twins? Lucas: Then you can take out twenty thousand dollars total, ten for each. Each beneficiary gets their own ten thousand dollar cap. But here's a wrinkle: some states conform to the federal rules for state income tax purposes, and others don't. So if you live in a state that doesn't allow a deduction for contributions used for K-12, you might end up paying state taxes on the earnings portion of the withdrawal. Luna: That's a big gotcha. So you get a federal tax break, but your state might treat it differently. Can you give an example? Lucas: Sure. Let's say you live in New Jersey, which as of 2026 does not allow a state deduction for K-12 tuition withdrawals. You contribute, say, five thousand dollars, it grows to six thousand, and you take out six thousand for tuition. The one-thousand-dollar earnings would be subject to New Jersey state income tax, even though it's federally tax-free. So you need to check your state's rules before you assume you're in the clear. Luna: That's a subtle trap. And I imagine a lot of people don't realize because they just think, 'Hey, it's a 529, it's all tax-free.' Lucas: Right. And the other thing to watch is the contribution side. Some states have aggregate contribution limits that are quite high, like four hundred thousand dollars or more, but a few states have lower limits that could be impacted if you're making big contributions for K-12 on top of college savings. But for most families, that's not a concern. Luna: So let's talk about who benefits most from this. Is this really just for families already committed to private school? Lucas: Not necessarily. Some families use it strategically for a few years of private school before switching to public, or for a specialized high school program. But the bigger appeal might be for families who want to prepay tuition to lock in rates. We saw a family in Texas, for example, who prepaid three years of private school tuition in one go, using their 529. That's allowed, but you need to be careful about the ten thousand dollar annual limit per beneficiary. Luna: Wait, if they prepaid three years, doesn't that exceed ten thousand for that year? Lucas: Great question. The limit applies to distributions per year, not to the total amount you pay in advance. So if you pay thirty thousand dollars in one calendar year for three years of tuition, the first ten thousand is a qualified distribution for that year, and the remaining twenty thousand would be treated as a non-qualified distribution unless you spread it out. But some states might allow you to treat it as prepaid for future years, but the federal rules are clear: only ten thousand per year is tax-free. Luna: So that family made a mistake? Or they just had to pay taxes on the extra twenty grand? Lucas: They had to be careful. In their case, they had other funds to cover the difference, so they took the tax hit on the earnings for the excess. But it's a classic pitfall. The IRS doesn't let you front-load multiple years of K-12 tuition in one calendar year and claim it all as qualified. The ten thousand dollar limit is annual, not per enrollment period. Luna: That's a crucial detail. So if you're thinking about prepaying, you need to plan the timing of the withdrawals across years. Lucas: Exactly. And there's another angle: the rollover to Roth IRA that we talked about in episode 163. That's a separate feature, but it's worth remembering that 529s have become more flexible overall. You can now roll over unused funds to a Roth IRA for the beneficiary, subject to certain conditions. But for K-12, the key is to know the annual cap and the state rules. Luna: And I guess the same logic applies if you're using a 529 for elementary school. The ten thousand dollar limit is per student per year, regardless of grade level. Lucas: Right. So whether it's kindergarten or senior year of high school, the cap is the same. And it's per beneficiary, so if you have two kids in private school, you can use up to twenty thousand dollars tax-free federally. Luna: That's a nice chunk of change. But I'm wondering, what about families who live in states with no income tax? Do they have to worry about the state deduction issue? Lucas: No, if you live in a state with no income tax, like Texas or Florida, you don't have to worry about state tax on the earnings. You just get the federal benefit. But if you live in a state that offers a deduction or credit for 529 contributions, you need to check if that benefit is recaptured if you use the funds for K-12. Some states, like New York, allow the deduction but then add back the earnings portion when you withdraw for K-12, effectively taxing it. Others, like Illinois, are more favorable and don't recapture. Luna: It sounds like a patchwork. So what's the best way to find out your state's rules? Lucas: The simplest thing is to check your state's 529 plan website or consult a tax professional. There's also a handy map from the College Savings Plans Network that shows the state treatment. But for a quick rule of thumb, if your state conforms to the federal definition of qualified higher education expenses, they might not automatically include K-12. You have to look for specific conformity to the K-12 provision. Luna: So let's get back to the practical side. If someone is listening and thinking about opening a 529 for their young child, what should they do differently knowing that K-12 tuition is allowed? Lucas: I'd say two things. First, consider the timing of contributions. If you think you might use 529 money for private school, you want to make sure your contributions are invested in a way that matches that shorter time horizon. You don't want to be too aggressive if you need the money in a few years. Second, keep records of your state's deduction rules, because if you claim a tax benefit and then use the funds for K-12, you might need to amend state returns. That's a headache you can avoid. Luna: Good points. And I imagine some parents might be tempted to use 529 money for other K-12 expenses like tutoring or sports. But those aren't qualified, right? Lucas: That's correct. The IRS is pretty strict. It's only tuition. So if you take a distribution for tutoring, that's a non-qualified withdrawal, and you'll owe income tax on the earnings plus a ten percent penalty. That penalty applies unless you qualify for an exception, like if the beneficiary gets a scholarship or attends a U.S. military academy. So you really want to avoid that. Luna: So it's a nice tool, but you have to follow the lines. I'm thinking about the donation break we usually have around here. Lucas, you want to say something about that? Lucas: Yeah, actually, a couple of dollars a month from listeners is what genuinely keeps these shows going. If you've gotten something out of our episodes, consider buying us a coffee at buy me a coffee dot com slash fexingo. It's a small way to support the work, and it really adds up. Luna: Absolutely. And we don't have sponsors or ads, so it's like a direct line from you to us. Every little bit helps us keep digging into these topics. Lucas: So, back to K-12. Another thing to keep in mind is that the ten thousand dollar limit is per beneficiary, but it's not indexed for inflation. So it's been ten thousand since 2018, and it's likely to stay that way unless Congress changes it. That means the real value of the benefit declines over time as private school tuition rises. Luna: That's a good point. So even though the limit seems fixed, its purchasing power shrinks. But for many families, it's still a meaningful tax break. Lucas: Exactly. And one more nuance: the K-12 provision applies to tuition at any public, private, or religious school. It doesn't have to be accredited, but it does have to be an elementary or secondary school, which is generally kindergarten through twelfth grade. So if you're sending your child to a preschool that's not part of the K-12 system, that doesn't count. Luna: So preschool is out, but kindergarten is in. And what about homeschooling? Does that ever qualify? Lucas: No, homeschooling expenses are not eligible. The IRS is clear that tuition must be paid to a school. So if you're homeschooling, you can't use 529 funds for curriculum or supplies. That's a common misconception. Luna: Good to know. So what's the one takeaway you want listeners to remember from this episode? Lucas: I think it's that 529s are more versatile than most people think, but the K-12 benefit is narrow: up to ten thousand dollars per year for tuition, and you have to navigate state tax rules carefully. If you're considering using your 529 for private school, check your state's specific treatment and plan the timing of your withdrawals to stay within the annual limit. Luna: And maybe talk to a tax advisor before making big moves. That's the safe play. Lucas: Absolutely. And if you're just starting to save, remember that a 529 can be a great tool for both college and, potentially, K-12. Just keep the rules in mind. Luna: Thanks, Lucas. That was a helpful deep dive. Lucas: Thanks, Luna. We'll catch you on the next episode.