Back-to-School Finances: Should You Use A 529 Plan to Pay for Private K-12 Tuition?
Back-to-school for your family may mean you are trying to figure out how to pay for private school tuition for your K-12 student(s)! If you are thinking about tapping your 529 plans to help cover the cost, you may want to rethink that decision.
Since 2018, the federal tax code allows 529 plans to be used for up to $10,000 per year to pay for qualified K-12 tuition. Warning: not all states have adopted this rule, you may not owe taxes on your federal return but watch out for the impact on state taxes! If you live in one of the states that does not allow for this, you may pay state capital gains taxes, need to repay tax deductions for contributions and pay penalties on withdrawals.
A 529 plan is a great way to save for education because you get tax-free compound growth over many years and in some cases a state tax deduction for contributions. If you start taking distributions earlier for K-12 tuition, you may limit the growth on your savings to fund college.
Just because you can use the 529 plan for K-12 education, it does not mean that you should use it. It is important to know the rules in the state where you live and the amount of savings you will need to pay for college when deciding whether to use 529 plan funds to pay for private school tuition.
Here are 3 scenarios when it may make sense to use your 529 plan for K-12 tuition.
- Overfunded 529- If you have more than enough saved for college, then using the 529 plan to fund K-12 tuition makes sense.
- Capture State Tax Deduction- If your state offers a state tax deduction for contributions to a 529 plan, then run the tuition money through the 529 plan to maximize the tax deduction.
- Temporary Solution- If you have a disruption in income due to job changes, health issues or other unexpected events, using the 529 plan for tuition can help to keep your child enrolled while your finances stabilize.
Remember to adjust your investments in the 529 plan if you will use funds sooner than college. It makes sense to move the money you will use over the next three years into a stable value fund option. That way in the event the stock market goes down, you will not have to sell stocks when they are down and limit recovery opportunities.
My two boys went to private middle & high school. For the most part my husband and I used cash flow to pay for annual tuition, but there were a couple of years that we pulled from the 529 plan to help. We accessed these accounts because we knew that we had enough to cover college costs, plus it was a short-term solution.
Private school can be expensive, and you may end up funding this expense for many years. If your back-to-school finances includes paying for private school, it makes sense to have a plan. If you need a strategy to fund private school tuition for your K-12 student(s) while saving for college, please reach out. We consider your cash flow, all assets and tax implications to find a strategy that will put you on track to cover the cost of education for your family!
