Using a 529 Plan for Private High School Tuition

A 529 plan is a tax-advantaged savings account designed to help families set aside funds for future education costs. The earnings in a 529 plan grow free from federal taxes, and withdrawals for qualified expenses are also tax-free. While historically used for college expenses, the federal Tax Cuts and Jobs Act of 2017 (TCJA) expanded the definition of qualified expenses to include tuition for elementary and secondary schools. This change allows families to use these accounts for private K-12 education.

In addition to this expansion, 529 plans offer other forms of flexibility. Families can use up to a lifetime maximum of $10,000 to pay student loan debt for the beneficiary or their sibling. To address concerns about unused funds, money from a 529 account can be rolled over to a Roth IRA for the beneficiary. This rollover is subject to conditions, including that the account must be open for at least 15 years, and is limited to a lifetime maximum of $35,000.

Defining Qualified K-12 Withdrawals

The federal rules for using 529 plan funds for K-12 education are specific. Families can withdraw up to $10,000 per year, per student, for tuition expenses at an elementary or secondary public, private, or religious school. This annual limit is applied on a per-student basis, not per 529 account. If a student is the beneficiary of multiple 529 plans, the total tuition withdrawals from all accounts for that student cannot exceed $10,000 in a single year.

Under federal law, the term “qualified expense” for K-12 purposes is narrowly defined as tuition only. This is a departure from the broader definition used for higher education, which includes expenses like fees, room and board, and books. Any withdrawal used for items other than tuition is considered non-qualified by the IRS.

If a distribution exceeds the $10,000 annual limit or is used for non-tuition expenses, the earnings portion of that withdrawal is subject to federal income tax. In addition to the income tax, a 10% federal penalty tax is assessed on those earnings. The principal portion of the withdrawal, which represents the original contributions, is returned tax-free since it was made with after-tax money.

State-Specific Tax Treatment

While the federal government permits tax-free withdrawals from 529 plans for K-12 tuition, state tax treatment is not uniform. The tax implications of a K-12 withdrawal depend on the rules of the state where the taxpayer resides, not where the 529 plan is domiciled. States have generally adopted one of three approaches.

• A majority of states have aligned their laws with the federal rules, allowing distributions up to $10,000 for K-12 tuition to be free from state income tax. In these states, families can realize both federal and state tax benefits.
• A second group of states has chosen not to conform to the federal change. In these non-conforming states, the earnings portion of the distribution is considered taxable income for state purposes, diminishing the overall tax advantage.
• The third category involves states that not only tax the earnings but may also impose a “recapture” tax. If a resident of such a state takes a withdrawal for K-12 tuition, the state may require the taxpayer to repay any tax deductions or credits previously claimed on those contributions.

Given the wide variation, it is important for account owners to verify the specific rules in their state of residence. Consulting the 529 plan administrator, the state’s department of revenue, or a qualified tax advisor is a necessary step before taking a distribution for private school tuition.

The Withdrawal Process

To make a withdrawal from a 529 plan, the account owner must contact the plan administrator, which is the financial institution that manages the account. The administrator will provide the necessary forms and instructions to initiate a distribution request. When requesting the funds, the account owner has two primary options for how the payment is disbursed.

The first option is to have a check sent directly to the account owner, who is then responsible for paying the school. This method provides flexibility but also places the burden of proof on the account owner to show the funds were used for a qualified expense. The second option is to request that the payment be sent directly from the 529 plan to the educational institution. This creates a clear paper trail linking the distribution to the qualified expense, which can be beneficial for record-keeping.

Regardless of the payment method chosen, account owners must maintain documentation. Account owners should retain copies of all tuition invoices from the school, canceled checks, and bank statements showing the payment. These records serve as proof that the 529 withdrawal was used in accordance with federal and state regulations.