529 plan rules allow for up to $10,000 per year to be applied toward private elementary or secondary school tuition expenses. Note that the only qualified expense that is stated in the rules is “tuition.”
As an example of how to use a 529 plan to pay for K-12 tuition, let’s say you open a 529 plan when your child is born. You make an initial deposit of $15,000 and monthly contributions of $396 through 12th grade. Assuming annual tuition costs of $10,000, a 5.5% school cost inflation rate and a 529 plan rate of return of 7.7%, your 529 plan would help cover 54% of your child’s total private K-12 tuition costs.
One caveat to applying distributions towards K-12 education expenses is that not all states are compliant with the recent changes.
If you withdraw funds for K-12 use and live in a state that doesn’t comply with the updates, you could be subject to state tax penalties or your ability to claim credits and/or deductions could be affected. You may also trigger a 10% penalty on non-qualified withdrawals.
Other than the $10,000/year withdrawal limit for K-12 tuition expense, all other 529 plan rules apply:
When planning, keep in mind the separate costs and different timelines for K-12 and college expenses.
As you start off your savings, determine the total amount you’ll need to cover for both K-12 tuition and college expenses. Match your investments within the 529 plan to the time horizon for withdrawals for both, as the earlier K-12 expenses and the later college expenses will have different timelines.
If your contributions only take into account the time horizon of college, your early withdrawals for K-12 tuition could possibly negate the growth potential of the contributions that are earmarked for later college expenses.
To simplify the investing and saving process, it may help to have a 529 plan dedicated for K-12 tuition and a separate one for college expenses. There are no limits to the number of 529 plans you can set up, but be sure to review the costs and expenses associated with setting up multiple accounts.
As you’re determining which options are best for your children’s education needs, it may be worthwhile to consult with a financial professional to discuss strategies that will be most advantageous in meeting your goals over the long-term.
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For more information regarding college savings plans, please visit www.collegesavings.org. Participation in a 529 plan does not guarantee the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses. Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state. Federal income tax on the earnings and a 10 percent penalty on distributions for non-qualified expenses may apply.