Can I Use a 529 to Pay for Private Elementary School?
Using a 529 for private K-12 tuition involves more than the federal allowance. Understand how state rules and expense definitions affect your savings.
A 529 plan, or “qualified tuition program,” is a tax-advantaged savings account where investments grow free from federal tax, and withdrawals for qualified expenses are also tax-free. While traditionally used for higher education, federal legislative changes have broadened the scope of these plans. This expansion now permits parents to apply these funds toward private elementary and secondary school tuition.
Qualified K-12 Tuition Expenses
The Tax Cuts and Jobs Act of 2017 (TCJA) expanded the definition of qualified education expenses for 529 plans. The law now permits withdrawals to pay for tuition at an elementary or secondary school. This change allows families to use funds from a 529 plan for tuition at eligible public, private, or religious K-12 institutions.
A financial constraint governs these withdrawals. Account holders can withdraw up to $10,000 per beneficiary, per year, for K-12 tuition. This limit is applied on a per-student basis, not per-account. If a student is the beneficiary of multiple 529 accounts, the total distributions from all plans for that student’s K-12 tuition cannot exceed the $10,000 annual threshold. Any amount withdrawn beyond this limit is considered a non-qualified distribution.
The federal law is specific that this $10,000 can cover only tuition. This narrow definition means that many other common educational costs are not considered qualified expenses under this provision, including:
- Registration or application fees
- Books and school supplies
- Uniforms
- Transportation costs
- Extracurricular activities or after-school programs
- Computers or internet access
This is different from the rules for higher education, where some of these items may qualify.
State-Level Tax Treatment of Withdrawals
While the federal government allows for tax-free withdrawals for K-12 tuition, state-level tax treatment is not uniform. The state where the account owner resides or the state that sponsors the 529 plan may have rules that do not align with the federal changes. This can lead to unexpected state income tax liabilities even when the withdrawal is federally tax-free.
Many states have updated their tax laws to conform with the federal guidelines. In these “conforming” states, a withdrawal of up to $10,000 for K-12 tuition is also free from state income tax. This alignment allows the earnings portion of the distribution to escape both federal and state taxation.
Conversely, some states do not conform to the federal government’s expanded definition. In these “non-conforming” states, using 529 funds for K-12 tuition is treated as a non-qualified distribution for state tax purposes. This means the earnings portion of the withdrawal is subject to state income tax, and some states may also impose a penalty on the earnings.
Another consideration is “tax deduction recapture.” Some states offer an income tax deduction or credit for contributions to their 529 plan. If a resident takes a withdrawal for K-12 tuition, the state may require them to pay back the tax benefit previously received on those contributions. This recapture negates the initial state tax advantage of contributing to the plan, making it a less attractive option for K-12 expenses.
Process for Paying a School from a 529 Plan
Plan administrators provide two primary methods for paying a school from a 529 plan. The first is sending the payment directly to the educational institution. The second method is reimbursing the account owner after they have paid the tuition bill.
To have the 529 plan administrator pay the school directly, account holders log into their online portal or submit a form to authorize a distribution. They will need to provide the school’s name, address, and the student’s ID number. The plan administrator will then issue a check or electronic payment to the school for the student’s tuition.
Alternatively, parents can pay the tuition bill out-of-pocket and then seek reimbursement from the 529 plan. The account owner submits a withdrawal request to the plan administrator for the amount of the tuition payment. The funds are then transferred to the account owner’s personal bank account.
This reimbursement method requires record-keeping. To substantiate the withdrawal as qualified, the account owner must maintain proof that the expense was for tuition, such as a tuition invoice, a canceled check, or a bank statement showing the payment. The reimbursement must be taken in the same calendar year that the tuition expense was paid to maintain its qualified status.