Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using Your 529 Plan for K-12 Private School Tuition
Transcript
- Lucas: So picture this: you're paying for private elementary school — let's say twelve thousand dollars a year — and you're doing it with after-tax dollars, getting zero benefit on your state income tax. Luna: Right, that's the reality for most families. But if you use a 529 plan, that same tuition could actually lower your state tax bill. Lucas: Exactly. And the key is that since the Tax Cuts and Jobs Act of 2017, 529 plans can be used for K-12 private school tuition — up to ten thousand dollars per year per beneficiary. That's a federal rule, but not every state conforms. Luna: So the federal government says it's a qualified expense, but your state might still treat it as a non-qualified withdrawal. That's a big gotcha. Lucas: Huge. Let's take a concrete example. In New York, you can deduct up to five thousand dollars per year per beneficiary from your state taxable income — but only if you use the New York 529 plan. And New York does conform to the federal K-12 rule. So if you contribute ten thousand dollars to the New York 529 and use it for private school tuition, you get a five-thousand-dollar deduction on your state return. Luna: At a state tax rate of around six and a half percent for a middle-income filer, that's about three hundred and twenty-five dollars in savings. Not huge, but not nothing. Lucas: And it compounds year after year. If you start kindergarten and go through eighth grade, that's nine years of tuition. Nine years of deductions. And the earnings inside the 529 grow tax-free, even if you withdraw them for K-12 tuition. Luna: But what about states that don't conform? Like California — they don't follow the federal K-12 rule at all. So if you take money out of a California 529 for private school, the earnings portion is subject to state income tax plus a two and a half percent penalty. Lucas: Right, that's the risk. So you really need to check your state's treatment. If you're in a state that offers a tax deduction for 529 contributions and conforms to K-12, it's a no-brainer. If not, the benefit is purely federal — tax-free growth — which is still valuable, but less straightforward. Luna: And I think a lot of parents don't realize you can use a 529 for private school at all. There's still this mental association that 529s are only for college. Lucas: Totally. And that's why we're doing this episode. So let's walk through a practical scenario. Say you have a child entering first grade at a private school costing fifteen thousand dollars a year. You contribute ten thousand to a 529 — the maximum K-12 eligible amount — and you pay the remaining five thousand out of pocket. Luna: Why not put the full fifteen thousand in the 529? Because the federal cap is ten thousand per year. You can contribute more, but only ten thousand is considered a qualified withdrawal for K-12. The extra would be treated as a non-qualified distribution if you tried to use it for tuition. Lucas: Right, and then you'd owe income tax on the earnings and a ten percent penalty on that portion. So you want to keep your K-12 withdrawals at or under ten thousand per beneficiary per year. Luna: And if you have two kids in private school, you can do ten thousand for each, so twenty thousand total per year. Lucas: Exactly. Now, the other consideration is timing. You need to have the money in the 529 before you pay the tuition. You can't pay out of pocket in September, then reimburse yourself from the 529 in December. The withdrawal needs to happen in the same tax year as the expense. Luna: And the IRS doesn't require you to show receipts upfront, but you should keep them. The school's invoice, a cancelled check, the 529 statement — just in case of an audit. Lucas: Good advice. Now, let's talk about what happens if you overfund. Suppose you use a 529 for K-12 for nine years, then your child gets a scholarship to a private high school — so you stop using the 529. Now you have maybe ninety thousand dollars in the account that was supposed to be for tuition, but it's still there. Luna: You can always change the beneficiary to another child, or even yourself for future education. And if none of that works, you can withdraw the money, but you'll pay taxes and a ten percent penalty on the earnings. Lucas: Right. But there's a way to avoid that penalty if the child receives a scholarship — you can withdraw up to the scholarship amount penalty-free. You still pay income tax on the earnings, but no ten percent penalty. Luna: And if you're worried about overfunding, you could use a Coverdell ESA instead. The Coverdell also allows K-12 expenses, but it has a much lower contribution limit — two thousand dollars per year — and income limits for the contributor. Lucas: So if you're a high-income earner, the 529 is your only option. The Coverdell phases out completely above a certain modified adjusted gross income. For married filing jointly in 2026, that's around two hundred and twenty thousand dollars. Luna: So the 529 is more accessible. And the ten thousand dollar K-12 cap is per beneficiary, not per account. So a grandparent could open a separate 529 for the same child and also withdraw ten thousand. Lucas: That's an interesting planning point. But it can get complicated. Let's keep it simple for most families: one 529 per child, contribute up to ten thousand a year, use it for private school tuition, and reinvest any leftovers for college. Luna: And don't forget the state tax deduction if your state offers it. That's essentially free money. Lucas: Right. So let's run a quick comparison. If you're in New York, earning a hundred thousand dollars a year, and you contribute ten thousand to the 529 for private school, you save about three hundred and twenty-five dollars on state taxes. Over nine years, that's almost three thousand dollars. Plus the tax-free growth on the earnings. Luna: And if you're in a state with no income tax, like Texas or Florida, you get no state benefit, but the federal tax-free growth still applies. Lucas: Right. So it's not a one-size-fits-all. But for many families, it's a solid strategy. One thing to watch: if you're using the 529 for K-12, you're not saving that money for college. So you need to have a separate plan for higher education. Luna: That's a great point. The K-12 use can deplete the account. So you might want to contribute more than ten thousand per year — up to the annual gift tax exclusion, which is eighteen thousand in 2026 — and then only use ten thousand for K-12, letting the rest grow for college. Lucas: That's exactly what we did for our kids. We contribute the maximum deductible amount in our state, use a portion for private school, and leave the rest to compound. It's a dual-purpose strategy. Luna: And if the money is in the account long enough, the earnings can be substantial. Even a few years of growth on a ten thousand dollar contribution can make a difference. Lucas: Absolutely. Now, one more nuance: the ten thousand dollar K-12 limit applies per beneficiary per year, but it's not indexed for inflation. So ten thousand today might not go as far in ten years, but it's still a meaningful amount. Luna: And if private school tuition goes up faster than inflation, you might need to cover the gap with after-tax dollars anyway. Lucas: Right. So the 529 is a tool, not a complete solution. But it's a tool that too many parents overlook. I think the biggest takeaway is: if you're paying for private school, look into your state's 529 rules. You might be leaving money on the table. Luna: And if you found that useful, we should mention how the show stays independent. If these conversations help you think differently about your money, the way we keep this ad-free is through listener support. Lucas: Yeah, it's a small gesture that goes a long way. If today's episode was helpful, you can support us at buy me a coffee dot com slash fexingo. Luna: And we really appreciate it. So back to the point — have you seen any states that are changing their conformity rules recently? Lucas: Actually, yes. A few states have started to conform in the last couple of years. For example, in 2024, Virginia updated its rules to allow K-12 withdrawals without penalty. So it's worth checking annually because the landscape is shifting. Luna: And if you're in a non-conforming state, you could always use a 529 from another state that does conform and offers a good investment lineup. You just won't get the state tax deduction. Lucas: Right. You can use any state's 529 plan, not just your own. So if your state doesn't offer a deduction, you can shop around for low fees and good investment options. For K-12, the key is just making sure the plan allows K-12 withdrawals — most do now. Luna: So the bottom line: 529 plans aren't just for college. They can be a smart way to pay for private K-12 school, especially if your state offers a tax incentive. Lucas: And with careful planning, you can use them for both K-12 and college, maximizing the tax benefits along the way. That's a win-win.