Can You Pay for Private School With a 529 Plan?

529 plans are tax-advantaged savings vehicles designed to help individuals save for education expenses. Historically, these plans primarily focused on higher education costs. Recent federal legislation expanded their utility, now allowing funds to be used for K-12 private elementary and secondary school tuition.

Qualified Private School Expenses

Federal law permits tax-free withdrawals of up to $10,000 per student annually for tuition expenses incurred at eligible public, private, or religious elementary or secondary schools. This provision, established by the Tax Cuts and Jobs Act of 2017, offers a specific use for these education savings accounts.

It is important to understand what expenses qualify and what does not. For K-12 education, only tuition expenses are considered qualified for tax-free withdrawals under the federal rule. This means that other costs associated with private schooling, such as uniforms, books, transportation, extracurricular activity fees, or room and board, do not qualify for tax-free treatment when paid with 529 funds. Using funds for non-qualified expenses can lead to tax implications and penalties.

Contributions and Withdrawals

Contributions to a 529 plan are typically made with after-tax dollars, meaning they are not deductible on federal income tax returns. However, the earnings within the account grow tax-deferred, and qualified withdrawals are entirely tax-free at the federal level.

When using a 529 plan for K-12 private school tuition, the annual federal withdrawal limit is $10,000 per student. Any amounts withdrawn beyond this limit for K-12 tuition or for non-qualified expenses will have the earnings portion subject to federal income tax and a 10% federal penalty. The principal contributions, made with after-tax dollars, are never taxed or penalized upon withdrawal. Anyone can contribute to a 529 plan, providing flexibility for family members or others to contribute to a student’s education savings.

Broader Financial Considerations

Beyond the direct payment of tuition, using a 529 plan offers additional financial benefits. Many states provide income tax deductions or credits for contributions made to 529 plans, which can result in further tax savings. These state-specific benefits vary, with some states offering deductions for contributions to any 529 plan, while others limit benefits to their in-state plans. It is advisable to explore the specific tax benefits available in your state of residence.

529 plan assets generally receive favorable treatment in financial aid calculations for future higher education. When owned by a parent or dependent student, these assets are assessed at a low rate, typically a maximum of 5.64%, when determining the Student Aid Index (SAI) on the Free Application for Federal Student Aid (FAFSA). This is a more favorable assessment compared to assets held directly by the student, which can be assessed at a higher rate. The flexibility of 529 plans also allows for unused funds to be rolled over to another eligible family member or saved for future higher education expenses for the same beneficiary, ensuring the funds remain useful even if K-12 tuition needs change.