Thanks to changes enacted in the Tax Cuts and Jobs Act, which was signed into law in December 2017, families are able to use funds in an eligible 529 college savings plan for more than college tuition and related expenses. Based on this law, each family can also use up to $10,000 in 529 funds for private K-12 tuition without any federal taxes or penalties.
With so many families across the United States doing online-school, a lot of parents are asking if they can use a 529 plan to cover expenses related to this - such as technology, internet access, and more.
Let’s break down what you need to know about using a 529 plan for something besides college education.
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The Rules Of A 529 Plan For K-12 Education
Federal law allows families to use $10,000 in 529 funds for K-12 tuition without any federal taxes or penalties. To be clear - that’s tuition only.
Whether families pay state taxes on withdrawals for private K-12 tuition depends on the state they live in. As of 2019, the following states don’t follow federal tax law in regards to using 529 funds for private school tuition: California, Colorado, Hawaii, Illinois, Michigan, Minnesota, Montana, Nebraska, New Mexico, New York, Oregon, and Vermont. Find your state in this list and see what the rules are for your state.
The $10,000 limit for private K-12 tuition is an annual limit, so families can use this benefit year after year. This limit is also per child, however, so a family with three children attending private K-12 schools could use up to $30,000 in 529 funds toward tuition every year they attend.
Unfortunately, using money in a 529 plan for private K-12 tuition doesn’t come with as much flexibility as using funds for college tuition and other higher education expenses. Where 529 funds can be used to pay for college tuition or for computers, textbooks, and other school supplies, money used from a 529 savings plan for private K-12 education can only be used for tuition and nothing else.
This may be somewhat bad news for private school families who are currently in the midst of a homeschooling crisis. Parents can use 529 college savings funds for private school tuition, but the funds cannot be used for additional costs involved in attending from home. These costs could include computers needed to attend private school e-learning, computer software, and more.
Why Fund Private School Through A 529?
While it would be nice if families could tap into 529 funds to pay for ancillary private school costs as the pandemic runs its course, there are still plenty of reasons it makes sense to fund private school through a 529 plan if your child attends one.
For starters, some families live in states where tax benefits are granted when you contribute to an eligible 529 college savings plan. In the state of Indiana, for example, taxpayers get a 20% tax credit when they contribute up to $5,000 to a 529 plan within a year. That translates into $1,000 back from the state when they max out this amount in a year, which is an instant 20% return on their money.
Meanwhile, Vermont’s official 529 college savings plan, VHEIP, gives each taxpayer a 10% Vermont state income tax credit on the first $2,500 contributed within a year.
Another reason to use a 529 plan to pay for K-12 education is to take some gains off of the table. This possibility is more likely to come into play if you started investing 529 savings funds aggressively from a child’s birth. If the money in your 529 fund is invested for long-term growth (as it should be), then using some money for K-12 private education expenses without having to pay taxes on those gains could be a smart move.
Finally, it could also make sense to use 529 funds to pay for private school if you believe you have overfunded your account. While this situation is certainly rare, there are definitely times when parents overplan and oversave out of an abundance of caution.
If your child is moving through school and it doesn’t look like they’ll need every dollar you have saved, then using the 529 funds for private K-12 education now can help you spend your savings down in a tax efficient manner.
Other Ways You Can Use 529 Funds
The SECURE Act, which stands for Setting Every Community Up For Retirement Enhancement, covered many federal tax law changes, including changes to 529 college savings plans. For instance, this act made it possible for parents to withdraw funds tax-free and without penalties for apprenticeship-related training costs.
So, if the apprenticeship qualifies for a withdrawal, you can pay for all the fees, supplies, books, and equipment needed to participate in the program. To find out for sure whether an apprenticeship you’re interested in counts, you can check whether the apprenticeship program is registered and certified under The National Apprenticeship Act. Also keep in mind that each state has their own rules for the tax treatment of withdrawals.
As you may know, you can also use 529 funds to pay for up to $10,000 in eligible federal student loan debt. Doing so may be dangerous, however, since you may miss out on tax deductions for student loan interest. You are also using money now that you may desperately need to pay for higher education expenses later on. And finally, just like using a 529 plan for K-12 education, many states do not conform with Federal law, so you may end up owing a surprise tax bill if you’re not careful.
The Bottom Line
Even if new legislation passes in Washington that makes withdrawing money for a broader range of remote learning-related expenses easier, remember to use caution when weighing the long-term financial impact of this choice.
In other words, really consider whether using 529 college savings funds for extra costs involved in private elementary or secondary education is worth disrupting your savings plan. Also keep in mind the investment returns you could get from those funds if you left them alone until college, and whether or not you may regret raiding this account later on.
Private schools are great, but many children excel equally in the public school system. With all of the economic unknowns in the near future, a well-funded college savings account could be a lifesaver down the road.
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October 05, 2020 at 09:20PM
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Can You Use A 529 Plan For K-12 Home Schooling? - Forbes
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