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Should I Use A 529 Plan For Primary School Tuition? Thumbnail

Should I Use A 529 Plan For Primary School Tuition?


A 529 plan is a special kind of savings plan that the government created to encourage saving for higher education costs. The Tax Cuts and Jobs Act of 2017 made some changes to the types of qualified expenses that you can deploy 529 funds against: they now allow you to use $10,000 per year for primary or secondary school tuition. The average annual cost of private primary education is estimated to be $9,631, so it’s logical to be curious about whether you can use 529 funds for private K-12 or elementary, middle, or high schools. But is it wise to do that?

Here’s a quick refresher on 529 plans

529 plans are tax deferred savings vehicles. That’s a complicated way of saying that they grow tax free. There is no tax to pay on the appreciation in value (the growth) of the fund. Accounts are usually invested in the stock market and rise (and fall) with stock market performance or generate interest. Some states even give you a state income tax credit or deduction for your contribution to a 529 plan. The only drawbacks about 529 plans are that they are a little restrictive. The funds can only be used tax and penalty free for qualified expenses. Qualified expenses include:

  1. College or graduate school tuition, supplies, fees, books, equipment, and even housing
  2. $10,000 of 529 funds may be used for private K-12 tuition at elementary, middle, or high school each year


But does using your 529 plans for K-12 make sense? Before you take withdrawals from your 529 plan to pay for primary school, here’s a few things to consider:

Tapping A 529 Early Can Be Costly - Large College Expenses May Be Just Around The Corner

On average, parents with children ages 14-18 have saved $52,300 for college. For those parents that have saved in 529 plans, the average balance in the account is $28,153 -  this is only half of the total cost of a college education at an in-state public university. A private university can be even more costly. If you tap the funds early, you may not have enough money for college expenses and you will curtail the fund’s ability to grow for several more years before college.

On the other hand, it’s also possible that your 529 plan has more than enough funds to cover your child’s college education and it’s important to use all of the funds in a 529 plan because they can only be used tax-and-penalty-free for qualified education expenses. If you run out of qualified educational expenses for which to use 529 expenses, withdrawals for non-qualified expenses are subject to a 10% penalty, and the earnings portion will become part of your taxable income.

If it becomes clear that your 529 plan has enough money or even too much, it may be advantageous to use it for K-12 school tuition. You might also consider changing the beneficiary to another family member. And remember, 529s can be used for postsecondary trade and vocation school tuition and fees, 2-year colleges, books, supplies, computer and internet expenses for college, and even for room and board if the beneficiary is enrolled for at least half-time.

Taking Tax Deductions For 529 Plan Contributions Can Be An Attractive Perk of Contributing, Even In Years When You Are Paying Tuition

For many taxpayers, 529 plans are attractive because they offer a state income tax break in some states. Overall, more than 30 states in the country offer tax credits or deductions related to 529 contributions.

Here’s a description of the potential tax savings you can get from a 529 tax deduction:

In New York, for instance, you can take $5,000 (or $10,000 for married joint filers) as a state income tax deduction for contributions to your 529 plan dollar-for-dollar (in other words, you need to contribute $5,000 to take a $5,000 deduction). If your applicable state income tax is 6.45%, your tax savings will be $322.50 (6.45% of $5,000) if you’re a single filer or $645 (6.45% of $10,000) for married filing jointly. You can even contribute, take the tax deduction, and use the funds for qualified expenses in the same year! Unfortunately, you can’t employ this strategy in Minnesota and Michigan since the basis of the tax deduction in those states is the net distribution (total contributions less total withdrawals.) More importantly, remember that those funds will hopefully grow over time and you won’t have a tax bill to pay on those capital gains if you use the funds for qualified expenses.

Beware - Some States Haven’t Caught Up With Federal Law!

While most state laws conform to using 529 distributions for K-12 tuition, some states have not caught up – and New York is one of these states. Taking distributions to pay for K-12 tuition in these states may be considered a non-qualified distribution. This means that you may have to pay state income taxes and penalties on the withdrawal. Any tax deduction for 529 contributions made in prior years may also become taxable on the year you make the withdrawal for non-qualified expenses. Here's a full guide on whether your state is compliant with Federal law

If you live in a state where K-12 tuition is a non-qualified distribution, it may be better to hold onto your 529 plan for college expenses (or post K-12 education expenses). As an alternative, you can set up another 529 plan in another state such as Utah which considers K-12 tuition a qualified expense to avoid the penalty but depending on where you live, you may lose the state tax benefits of the contribution because you have used another state’s 529 plan. Unfortunately, only seven states offer a tax deduction for contributions to an out-of-state 529 plan.

More Points To Ponder About 529 Plans

  • Nonresident Aliens Can’t Open 529 Plans. Only US citizens and resident aliens can open 529 plans
  • 529 Plans are Subject to Gift Tax Limits. In 2019, the annual gift limit is $15,000 to an individual such as a child ($30,000 if you are a married couple because each of you can give $15,000) and $11.18 million during your lifetime without paying gift or estate tax. It’s advisable to limit annual contributions to $15,000 for each child ($30,000 if a married couple). You may also elect for a one-time contribution of $75,000 spread over five years to avoid exceeding the gift tax limits ($150,000 if you are a married couple)
  • Strategies For 529 Plans If Your Child Gets A Full Scholarship Or Chooses A Different Path. If your child gets a full scholarship or decides to delay or forego college, you can switch the beneficiary to a qualified family member or leave the money in the fund in case your child changes his or her mind. You may also withdraw the funds for nonqualified expenses subject to income tax and penalties. It’s also possible to rollover 529 plans to tax-favored ABLE accounts to pay for expenses for disabled children
  • The Upromise Credit Card Can Help You Save In Your 529 Plan. If you have an eligible 529 plan linked to a Upromise program account, you can receive a 15% bonus on your cashback.  
  • Did You Know That You Can Use Any State’s 529 Plan? Some states like Arizona and Kansas even allow residents to take the tax credit or deduction for contributions to another state’s 529 plan. Some plans are better than others - they allow a greater diversity of fund options or lower fees, so it can pay to shop around. However, you might want to use your own state’s 529 plan if your state only allows a state income tax credit or deduction for contributions to their own plan.

Fun Fact: There’s a way to start a 529 plan for your unborn child. 529 plans require a living beneficiary with a Social Security Number to open, so you need to set up the plan in your own name and list yourself as a beneficiary. You can change the beneficiary to the child once it is born but beware of the gift tax limits when switching beneficiaries.

Consider the Tax Consequences of Using Funds from 529 Plans Before College

To make most of 529 plans, it’s best to have time on your side to maximize tax-free growth. Through the power of tax-free compounding, you will realize the greatest benefit from your funds if you leave them in the account for longer. However, there are instances where it makes sense to use 529 funds prematurely for K-12 tuition.

It’s worth noting that every state has unique 529 rules (and their own 529 plans). So, your situation will depend on where you live and earned money, as well as, your child’s plan for college. An experienced financial advisor like MYRA can help you maximize your tax advantaged college savings strategy no matter where you live in the United States.

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