College savings for private elementary school? Let's get to the bottom of this

Updated: Dec 19, 2019

Do you have elementary or secondary aged children enrolled in private school? You may be wondering if you should route tuition payments through your child's 529 plan or use existing 529 funds. A word of caution... don't jump in to distributions so fast, it's complicated.

The 2017 Tax Cuts and Jobs Act has further increased flexibility behind college 529 savings plans. 529s (technically called qualified tuition programs) were created over 20 years ago to encourage savings for college and they get their name from the tax code they are under. Earnings on these investment plans are not taxed when they are used for qualified college expenses and many states allow a tax deduction when contributing into the plans. The 2017 law allows for distributions from 529 plans to include tuition for primary or secondary education up to $10,000 per year, per family.

Our Recommendations:

Before moving forward, ensure your state has formally approved this federal change. Although the federal government created 529s, they are administered by the individual state (not necessarily your state of residence, but rather, the state that manages your particular 529). Many states have formally agreed that they will allow distributions to cover elementary and secondary tuition, but many states have not.

Next, know that the tax benefits of 529s are two-fold:

  • Some states allow for a state deduction with contribution, usually up to a certain amount (see below)

  • Secondly, the earnings and growth of these funds are federal tax free when used for qualified expenses. Meaning, even if your state allows for 529 funds for elementary / secondary tuition under the new act, if the funds do not have significant time to grow in the 529, you lose that appreciation tax benefit. This happens because the tax free growth is so valuable.

Last to consider, if the 529 balance exceeds the expected college cost, a distribution for elementary/secondary education may be a beneficial route, but there are still other options.


Your evaluation:

  1. Which state manages your 529? (You can find this on your statement).

  2. Has that state declared if they will allow 529 distributions for elementary and secondary tuition?

  3. Do you have 529s savings upwards of what your child will need for college? If that's the case, then in addition to considering pulling funds out for elementary/secondary tuition, another option to keep in mind is to allow these funds to continue grow further for their children or siblings.

  4. If you are considering routing tuition through a 529, which state tax deduction are you eligible for? Remember you receive the potential state tax deduction when you are investing in your home state's 529, which may not always be the right fit.

  5. Multiply your tuition per year (up to $10,000 per family) by your state tax rate.

  6. If you're already contributing to your children's 529, you may already be receiving the max state benefit for contributions.

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