In the ever – evolving landscape of education financing, a significant shift occurred following the tax overhaul in late 2017. Among the many changes, the rules surrounding 529 plans were rewritten, opening up new possibilities for parents. Now, under the provisions of the SECURE Act, parents might be able to withdraw up to $10,000 per year to cover private primary and secondary education tuition, given that their state allows such withdrawals. But what exactly does this mean for families, and how can they best take advantage of this new opportunity?
The Basics of 529 Plans
A 529 plan is a state – sponsored savings plan designed to help families save for future educational expenses. These plans offer tax – advantaged growth, meaning that the money invested in them grows federally tax – deferred. When withdrawals are made for qualified educational expenses, they are also tax – free at the federal level. Prior to the 2017 tax changes, qualified expenses were mainly associated with post – secondary education, such as college tuition, fees, room and board, and books. However, the tax cuts and jobs act broadened the scope, allowing for tax – free withdrawals of up to $10,000 per year per beneficiary for private K – 12 tuition.
How to Use a 529 Plan for Private K – 12 Tuition
If you’re considering using your 529 plan for private elementary or high school tuition, the process is relatively straightforward. First, you need to check with your state’s 529 plan administrator. Some states may not have adopted the federal change, and using the plan for K – 12 tuition in those states could result in state income taxes and penalties. For example, in California, withdrawals from a 529 plan for private education are subject to state income taxes and an additional 2.5% tax, as the state’s ScholarShare 529 plan does not align with the federal expansion.
Once you’ve confirmed that your state allows it, you can withdraw the funds from the 529 plan. You’ll typically need to transfer the money to your checking account and then use it to pay the school tuition. It’s crucial to keep detailed records of how the funds are used, as the IRS may audit to ensure that the withdrawals are for qualified expenses. Remember, only private school tuition is eligible under this new rule. Expenses like school supplies, uniforms, field trips, or computers cannot be paid for with 529 plan funds for K – 12 education.
When Does it Make Sense to Use a 529 Plan for Private K – 12?
- Overfunded for Higher Education:
- If you’ve been diligently contributing to a 529 plan for your child’s college education and it seems that there will be a surplus by the time they reach high school, using some of the funds for private secondary education can be a smart move. For instance, if your child is a talented athlete or an outstanding student and is likely to receive significant scholarships for college, the 529 plan may not be fully utilized for higher education. In such cases, using the funds for private school tuition can make good financial sense.
- Capturing Tax Credits or Deductions:
- Many states offer tax credits or deductions for contributions to a 529 plan. If you live in a state with such incentives and you’re already planning to pay for private school tuition, running the money through the 529 plan can be beneficial. For example, if your state offers a tax deduction for 529 plan contributions and your child’s private school tuition is $8,000 per year, you can contribute the amount needed to pay the tuition to the 529 plan, take the tax deduction, and then withdraw the funds to pay the school. This way, you’re getting a financial benefit for an expense you were going to incur anyway.
- Taking Gains Off the Table:
- If your 529 plan has experienced substantial growth, you might consider using some of the funds for private K – 12 tuition to “lock in” those gains. Since withdrawals for qualified expenses are tax – free, if you’re already paying for private school, using the 529 plan to cover the tuition can be a strategic move. You can then adjust the remaining investments in the 529 plan to a more conservative strategy, perhaps shifting more towards cash or low – risk investments.
Considerations Before You Dive In
While the ability to use 529 plans for private K – 12 tuition is an attractive option, it’s not without its drawbacks. Withdrawing money early in a child’s life may limit the long – term tax – free growth potential of the 529 plan. The power of compound interest is significant over time, and using the funds too soon could mean missing out on substantial growth that could have been used for college. Additionally, if you’re relying on financial aid for college, using a 529 plan for K – 12 tuition could potentially impact your eligibility, as some financial aid formulas now take into account the availability of these funds.
In conclusion, the new rule allowing the use of 529 plans for private elementary and high school tuition can be a valuable tool for families. However, like any financial decision, it requires careful consideration of your state’s regulations, your family’s financial situation, and your long – term educational goals. By weighing the pros and cons, you can make an informed choice about whether this option is right for you.
