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Here are some of the finer points of the K-12 side of 529 plans.
529 plan rules allow for up to $10,000 per year to be applied towards elementary or secondary school tuition expenses. Note that the only qualified expense that is stated in the rules is “tuition.”
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 percent penalty on non-qualified withdrawals.
Other than the $10,000/year withdrawal limit for K-12 tuition expense, all other 529 plan rules apply:
As an option, you can choose to contribute a lump sum of up to $75,000 (or $150,000 for joint-contribution) in one year and elect to have the contribution considered “spread” over five years. This essentially allows you to use five years of annual gift exclusions in one year. This larger gift would not be subject to the gift tax if the person who made the gift lives for the full five years. So the feature can be an effective strategy for long-term estate and gift planning, as the larger upfront gift helps to remove those assets from the donor’s estate and helps to maximize compound growth inside the 529 plan.
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 and a separate one for future 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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