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How to Use a 529 to Pay for K-12

As of January 2018, parents can now use their 529 plans to pay for private K-12 tuition. Originally designed for college, 529 plans allow tax-free earnings growth and tax-free withdrawals when the funds are used to pay for expenses that meet the requirements. That now includes private school tuition.

When using the 529 funds for college expenses the rules for what you can spend the money on are a lot more broad. When using a 529 plan to pay for K-12 expenses, it can only go towards tuition. Anything outside of tuition, like school supplies or field trip expenses are not covered. Under the new law, you can withdraw $10,000 per student, per year and put it towards K-12 tuition. This only applies to students who attend private schools that require tuition. If your students go to public schools, their school expenses are not covered by the new law and you are unable withdraw money from your 529 to cover those expenses.

The biggest advantages of 529 plans are the tax deductions and the ability to withdraw money without having to pay tax on the growth. But, to get the most value from your 529 plan, you need to have time to let it grow. Before deciding to use your 529 plan to help pay for K-12 tuition, there are a couple things to consider.

The first, when will you need to withdraw money from the 529? If you take out money now, will it still have the time it needs to grow. If you have young children and are planning on using the money to pay for high school tuition, you still have a good amount of time to let the 529 account grow. If you don’t have that time, it may be a good idea to look at other ways of funding the private school tuition.

Second, what are your student’s college plans? Are they a talented athlete or scholar who will receive a scholarship that may pay for most of their university expenses? Maybe your student has decided college is not for them, or they choose an inexpensive college. Whatever the reason, if you think you may not need all the money in your 529 plan, it may be a good idea to start using some of that money to pay for private school tuition. Also keep in mind you can transfer money not used to another 529 beneficiary like a sibling without any penalties.

Third, consider how much you are spending a year on private school tuition and if $10,000 a year covers that. Although the average private school tuition is $10,302, many private schools can cost a lot more, even around $30,000 (especially in urban areas). The higher the cost of tuition, the less federal tax savings on $10,000 may mean to you. It’s also important to understand that if you are hoping scholarships may cover some of the tuition for your student’s private school, the financial aid department at that school may start to include the value of 529 plans in their financial need analysis.

If you’re going to use your 529 plan to pay for your student’s private school tuition it’s important to know the rules of your state and how they apply to your 529 plan. Each state differs in tax deductions related to a 529 plan and how they apply to your own situation.

Using a 529 plan to pay for K-12 tuition is a great idea in some cases. Make sure you have enough money left to cover the cost of college tuition which is on the rise. Go through the list of benefits and access your contribution and savings plans before making the final decision on whether it’s worth it.

Sources: Washington Post , The College Investor , The College Investor , EdChoice 

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