The 2017 tax reform package expanded 529 plan benefits to include tax-free withdrawals for private, public or religious elementary, middle, and high school tuition. The law also allows traditional 529 accounts to be rolled into 529 ABLE accounts without taxes or penalties. This page includes all the information available on this and other new benefits of 529 plans as of 2022 and will be updated regularly as additional details become available.
In this article
- 529 plans can be used for private elementary and high school tuition
- States that don’t consider K-12 tuition a qualified expense
- A 529 account can be rolled over to an ABLE account
- Pros and cons of using a 529 plan for private school expenses
529 Plans Can be Used for Private Elementary and High School Tuition
The Tax Cuts and Jobs Act, which was signed into law in December 2017, allows families to use 529 plans to pay for up to $10,000 in tuition expenses at elementary or secondary public, private or parochial schools. The changes became effective January 1, 2018.
Federal Tax Benefits
529 plans offer tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified expenses. Prior to the Act, the definition of qualified expenses was limited to costs associated with attendance or enrollment at a college, university or other accredited post-secondary institution. Today, families can also take tax-free withdrawals to pay for up to $10,000 of K-12 tuition.
Private School Tuition Might be a State Tax Deduction
Over 30 states offer a tax credit or deduction for contribution to a 529 savings plan. In most cases, residents must use their home state’s plan in order to qualify, but families who live in Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania can claim a tax deduction for contributions to any state’s 529 plan. Maximum deductions and credits vary by state.
It’s important to remember that these state tax breaks are only available when the funds are withdrawn to pay for expenses that the state considers qualified, which may or may not include K-12 tuition. States are currently reviewing the impact of the federal tax change to determine whether updates to state legislation are required.
At the state level, non-qualified withdrawals may be subject to state income tax and, in some cases, a penalty on the earnings portion. You may also have to repay any deductions or credits claimed.
States That Don’t Consider K-12 Tuition a Qualified Expense
Many states do not consider K-12 education to be a qualifying expense which means they have not decided to follow the federal tax laws on the matter. If you live in one of these states and take money out of your 529 plan in order to pay for K-12 education then you may end up owing state taxes for the withdrawal.
The states where you may owe for these withdrawals are:
- New Mexico
- New York
Keep in mind that this law is still somewhat new and so changes could happen at the state level at any time. We will continue to monitor this and try to keep the list as up-to-date as possible.
Selecting a 529 Plan
When deciding which plan to use for private school education funding, you’ll want to start by exploring your home state’s plan. Over 30 states offer a tax credit or deduction for 529 plan contributions, but non-qualified withdrawals can be subject to state tax recapture. Currently, only a small number of states have conformed to federal law, but people who live in these states may be able to deduct all or a portion of their private school tuition expenses from their state taxable income.
At this time, there are no specific 529 portfolios designed for private K-12 education funding, but that doesn’t mean you can’t find suitable investments. With less time to recover from a market downturn, you want to explore conservative options such as a money market or a stable value portfolio.
How Much to Save for K-12 Tuition
To create an effective 529 funding strategy, you’ll need to determine how much is needed to fund the lesser of the total tuition liability, or the maximum allowable withdrawal amounts so that you will end up with a $0 account balance after paying the final year of private school tuition. This could be achieved with an initial lump sum deposit, monthly contributions or a combination of both.
For many people, annual expenses will exceed the $10,000 tax-free withdrawal limit. For the 2017-18 school year, private school tuition costs ranged from $2,562 – $14,338 for elementary school and $5,262 – $31,567 for high school, according to the Private School Review. Any cost gaps – amounts that won’t be covered by 529 plan savings, will have to be paid with current income, scholarships, financial aid or other sources.
To help you calculate how much to save in a 529 plan, we’ve developed the 529 Savings Calculator for Private K-12 Tuition. Example: You want to use a 529 plan to pay for your two-year-old child to attend private school from 1st through 8th grade. Annual tuition is currently $5,000 but has been increasing at 5.5% each year. You have $20,000 to deposit today, and want to know how much more you’ll have to contribute each month.
A 529 Account Can be Rolled Over to an ABLE Account
The new tax law also allows tax-free rollovers from traditional 529 savings accounts to 529 ABLE accounts. ABLE accounts offer tax-free investment growth and tax-free withdrawals when the funds are used to pay for qualified disability expenses, including education, job training, healthcare and financial management. Contributions, including rollover contributions, are limited to $15,000 per year, and only the first $100,000 saved in the account is exempted from the $2,000 Supplemental Security Income (SSI) limit. Beneficiaries with account values greater than $100,000 will not receive SSI benefits, but will still receive Medicaid.
Under the current law, individuals who are working and earning income can contribute an additional amount to an ABLE account, up to the current poverty level, above the $15,000 limit. This is provided they do not participate in their employer’s retirement plan.
To qualify for an ABLE account, an individual must have been diagnosed with a significant disability before their 26th birthday, with a condition expected to last at least 12 consecutive months. The individual must also be receiving benefits under SSI and/or SSDI, or be able to obtain a disability certification from a doctor.
When You Might Want to Use Your 529 Plan for Private Tuition
In many cases, using a 529 plan for private school when your child is young can mean you miss out on potential tax benefits. However, there are some circumstances when it makes sense to use the 529 for primary or secondary expenses. For example, it may emerge that your child won’t need all of the funds for college, whether they decide not to pursue higher education, want to attend an affordable college, or look likely to get a scholarship.
In this case, if you are already paying for a private school, and don’t have another child who you could make the beneficiary of the plan, it may make sense to use some of the 529 for their secondary school tuition. This could also be the case if you’ve earned substantial gains through the 529 plan and want to make use of them with qualified distributions, such as elementary or secondary school tuition.
It can also be beneficial to use the 529 to pay for elementary or secondary school if you’re able to get tax benefits by doing this. If your state gives a tax deduction for 529 plan contributions, you can capture a deduction by paying your child’s school fees into a 529 plan first, before withdrawing the funds and using them to pay tuition. You’ll pay the same expense you were planning to pay anyway, but you’ll benefit from a tax deduction, and may even get a credit.
Note that only private school tuition (not other fees) are qualified distributions under 529 plans. There is no provision to use 529 plan funds for homeschooling expenses, but some states classify homeschooling as a type of private school. If you live in one of these states – Alaska, California, Illinois, Indiana, Kansas, Kentucky, Nebraska, or Texas – you can probably use funds from your 529 plan to cover certain homeschooling expenses that meet the same criteria as tuition.
Alternatives to Pay for Private School
There are other types of plans and savings accounts to help pay for private school tuition that you can use to cover a broader range of educational expenses no matter where you live. For example, Coverdell ESAs allow you to use funds for a range of qualified education expenses. However, these plans have strict contribution limits, so it’s important to compare all options to work out which is the best for your situation.
Pros and Cons of Using 529 Plans for Private School
When weighing any important financial decision you’ll want to look at the positives and negatives of moving forward. The pros and cons of using your 529 plan for private tuition could vary by person as your personal financial situation could change the impact. Let’s take a look at the most generic pros and cons of making this decision, though, that are relevant for everyone.
Pros of using 529 for private school:
- Capital gains tax: You can avoid capital gains taxes at a federal and possibly state level, depending on the state you live in.
- Tax deductions: Your state may offer state-tax deductions or credits on contributions, allowing you to get tax benefits on tuition expenses.
- Growing available funds: You could grow your 529 accounts by putting more money in earlier.
Cons of using 529 for private education:
- Limit returns: You may limit the returns you earn on your 529 by taking money out too early.
- Could be taxed: Not all states give tax deductions on contributions, and some consider K-12 tuition a non-qualified distribution, limiting state-tax benefits.
Ultimately, whether you should choose to use a 529 plan to pay for private school expenses depends on your family’s situation. Some factors to weigh with the pros and cons above include:
- How much you have in 529 assets
- How much do you plan to add to your 529 plan
- How much do you think you’ll need to pay for your child’s college education
- Your state’s tax rules around 529 disbursements
Using a 529 Plan to Pay for Private School Tuition
Once you decide to move forward with using your 529 plan to pay for K-12 private school tuition, the next step is determining how much you’ll need in the account so that you can plan accordingly. Using the Saving for College calculator for private tuition, you can figure out how much you’ll need. Here is an example:
Source: Saving for College Calculator
As illustrated in the chart above, with a $20,000 initial deposit, you would need to start making monthly contributions of $276 to effectively fund your future tuition costs. With this strategy in place, you would only need to come up with an additional $580 to pay for the child’s junior year high school tuition, and $1,162 for senior year. With no account balance remaining, you would avoid the possibility of a non-qualified withdrawal and incurring taxes and penalties.
This example doesn’t take state tax benefits into consideration, but if you live in Missouri, for example, you may qualify for a tax deduction. Contributions to any state’s 529 plan of up to $16,000 by a married couple are deductible in computing Missouri taxable income, so your client would be able to claim a deduction for the entire $3,312 ($276 per month) in contributions each year. To calculate the value of a potential state tax benefit, try the State Tax Calculator.
Frequently Asked Questions (FAQs) for 529 Plans and Private Tuition
We’ve compiled some of the most important and frequently asked questions regarding using a 529 plan for private tuition and answered each below.
Can you use 529 for private school K-12 expenses?
Under the federal tax code, K-12 school tuition is considered a qualified distribution for 529 plans, but this does not include other expenses such as books and computers. Private school tuition may or may not be a qualified distribution for state tax depending on where you live, as rules vary by state.
Can I use 529 for private tutoring?
No, private school tutoring is not a qualified expense. When using a 529 plan to pay for a private school, only private school tuition is considered a qualified distribution from the plan. This does not include tutoring at an elementary or secondary school level.
Can 529 be used for private high schools in California?
Although California residents can access the same federal tax benefits of using a 529 for high school, their state tax will be adversely affected. Currently, California considers 529 withdrawals for secondary school tuition a non-qualified distribution and even imposes a penalty.
Can I use the proceeds of a 529 plan for homeschooling?
You might be able to use a 529 plan to cover homeschooling, depending on the state that you live in. Some states consider homeschooling as a type of private school, so you may be able to claim qualified expenses related to your child’s homeschooling. The states that allow this type of expense are currently:
Your 529 plan can be used to pay for private school K-12 tuition and other expenses. Whether you pay taxes for the withdrawals depends on what state you live in and whether you should do it depends on your financial situation. It might be a good idea if you have enough to pay for college and can’t transfer the plan to another relative to be the new beneficiary.