How The Recent Tax Reform Extended 529 Plans to Kindergartners and High Schoolers

While most families associate 529 plans with college or university, few know that they can now be used for K-12 private education. The new tax law passed by Congress last year included a provision in which parents are now allowed to pay for private school education from kindergarten to twelfth grade. Under the new law, families can withdraw $10,000 per student per year to pay for tuition expenses at private elementary schools, high schools and parochial schools. Keep in mind though, the law only covers private institutions and only applies to tuition costs – it excludes things like books, laptops, or other expenses often covered by 529 plans.

According to the Council for American Private Education, about 10% of children attend private schools. If you’re one of the parents whose child is enrolled in a private education facility and want to use your existing 529 plan to cover their tuition, there are a few more things to be wary about.

State Uncertainty

529 plans are often administered by the states. Since the new law was passed, not all states have updated their tax codes to align with the federal governments. Some parents who withdraw money to pay for the K-12 expense may find themselves face the income tax and 10% penalty. You may also have to repay a state tax deduction or owe taxes on the gain you’ve made in your 529 account. Before withdrawing anything from your plan, check your state tax code to ensure that you won’t face any penalties.

Short Term Risk

529 plans were designed with time in mind. Standard account withdrawals start 10 to 15 years after the account is set up in order to cover the first years of college. If you end up withdrawing from the account a few years after it was set up, you risk exposing yourself to the volatility of the market.

Withdrawal Limit

So, you have a child who’s gearing up to attend a prestigious private elementary or secondary school. Great! You want to utilize as much of that $10,000 yearly allowance as possible, but you’re asking yourself – is there a catch? With 529 plans the parent or account custodian controls the money for the beneficiary, in this case the private school attendee. As long as the money is used for the beneficiary’s qualified education expense under the plan, you’ll be fine. If the money isn’t used for a qualified expense, then the IRS comes a knocking. You’ll not only have to pay income taxes on the withdraw but will also face a 10% penalty fee.

Given these limitations, we at U-Nest think that it may be in the best interest of families to grow their 529 account and utilize the money for college and university. However, if you do need to withdraw funds from your plan, it’s good to keep in mind some of the possible repercussions. To learn more about 529 Plans and their amazing benefits, check out our blogs here.

This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.