October 23, 2020

How to Use a 529 Plan for Private School

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A 529 plan isn't just for college. Find out below how to use the funds for your children's private elementary and high school education.

Did you set up a 529 account for your child, then put it on the backburner because college is still many years away? Laws have changed. You might want to invest—and dip into—that cash much earlier.

What Is a 529 Plan?

A 529 plan is a tax-advantaged investment account similar to an IRA. It lets you save money for higher education expenses. But now, you can also use it for private elementary and high schools.

Most plans let you set it and forget it. Automatic deposits can be set up from your checking account or via a payroll deduction.

The money in the account is managed by an outside investment firm hired by the program manager or the state treasurer's office. These plans are a very hands-off way to save for college.

What Does a 529 Plan Cover?

Using your 529 account is simple. You withdraw funds and transfer them to your checking account. From there, it's cash you can put toward your children's education.

But what's actually covered? It depends whether you use it for elementary/high school or college. As a college savings account, the 529 plan is eligible for a relatively wide range of qualified expenses.

For primary or secondary education expenses, you can only use your 529 money to pay for tuition—nothing else. The plan won't cover any other expenses like field trips, school supplies, or books.

The limit for withdrawals is $10,000 per year. Withdrawals used for any expense other than tuition will be hit with a 10% penalty. And you'll also be required to pay ordinary income tax on earnings.

Whether you can use it for homeschooling depends on your state laws. Some states consider homeschooling as private schooling.

How to Open a 529 Plan

Each state has its own 529 plan, and you can invest in any of them. More than 30 states offer a tax break for 529 plans, so be sure to check your home state first.

If plan fees are high in your state, that's when you might want to look for out-of-state plans for a better deal.

Check out this tool to view your state tax benefits and compare plans nationwide:

Who Should Use a 529 Plan for Private School?

Don't rush out to withdraw money from your child's 529 plan to pay for his or her private school tuition just because you can. Part of the benefit of these plans is that the money has many years to grow.

A 529 plan is meant to be a relatively long-term investment. But there are some circumstances where using it for K-12 can make financial sense:

Need Money in a Pinch
If your family's income gets impacted while your kids are already enrolled in private school, consider using that 529 money. It can be an excellent way to avoid the upheaval of pulling your kids out of their current school.

More Than Enough Saved for College
Saving too much money is never a bad thing! But for various reasons, you may have a lot more money in your 529 plan than will be necessary for college.

For example, your child could get lots of scholarships, or they may choose a less expensive college than you had anticipated. If this is the case for your student, you can make withdrawals to pay for private school tuition to help drain the account without paying the penalty.

Keep in mind that you can also change the beneficiary. If you have another college-bound child, you can always transfer over your funds.

Take Advantage of Tax Benefits
Many states provide a tax deduction or tax credits when you use the plan administered by your home state.

Contributions to a 529 plan are considered gifts. For 2020, gifts up to $15,000 per person qualify for the annual gift tax exclusion. The $15,000 gift tax exclusion amount also includes any other cash or property gifts in addition to 529 plan contributions.

Currently, more than 30 states provide these tax benefits. Six of those offer the tax benefits when savers choose any state's plan, not just the plan administered by your primary state of residence.

Find Out How Your State's 529 Plan Works

Federal laws have expanded 529 plans to include private K-12 education. Still, not every state has updated their tax laws to do the same.

What does that mean for you? The federal government won't tax the 529 money you use for private school tuition—but your state government might.

Here are the states that do not conform to federal 529 plan laws for elementary and high school use:

  • California
  • Colorado
  • Hawaii
  • Illinois
  • Michigan
  • Minnesota
  • Montana
  • Nebraska
  • New Mexico
  • New York
  • Oregon
  • Vermont

Always make sure you double-check your states laws before you use your 529 plan money.

Bottom Line

If you plan to enroll your kids in a private school, being able to use your 529 is a nice benefit. On the other hand, you can use it just for college if you didn't plan for private elementary and high school.

Whatever you decide, it's important that you know all your options when it comes to investing in your child's education.

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