Can you use 529 plans for k-12 tuition?

You can now use these tax-advantaged savings plans to pay for more than just college—but should you?

The cost of tuition for private K-12 schools can rival that at some colleges. So, the fact that parents and grandparents (thanks to changes implemented under the 2017 Tax Cuts and Jobs Act) can now put funds from a tax-advantaged 529 savings plan toward K-12 private school tuition sounds like good news.

If you have a child or loved one in private school and are considering using 529 funds to help cover those expenses, it's important to understand the pros and cons.

If you're not already familiar, a 529 plan is a state-sponsored account that lets you save for education expenses. Money in a 529 plan can be invested, and any earnings in the plan grow free of federal and state income tax (there may be exceptions, so check with your state). In some states, you may also receive a state income tax deduction or tax credit on the contributions you make.

What’s new: Using 529 funds for private K-12 tuition

Previously, funds from a 529 plan were limited for use toward qualified higher education expenses, including college tuition, fees, books and other supplies. Now, funds can be used for K-12 private schools, although notably only K-12 tuition expenses are eligible, and only up to an annual limit of $10,000. There is no limit on withdrawals for qualified college expenses. Moreover, some states will tax 529 funds withdrawn for private school costs.

Rules and regulations for 529 plansi

  • Earnings are not subject to federal tax when used for eligible college expenses.
  • Earnings are often not subject to state tax.
  • States may offer other incentives to in-state participants.
  • There are no income restrictions on individual contributors.
  • Unlike with IRAs or 401(k)s, there are no annual contribution limits.
  • You can change the beneficiary of a plan if the new beneficiary is in the same family.
  • You can open a plan benefiting anyone: a relative, a friend or even yourself. 
  • The plan owner or custodian controls the funds until withdrawal, not the beneficiary.

529 plans impact on investments and returns

One of the main benefits of saving for college in a 529 plan, especially if you start when the child is still young, is the tax-free compounding of your savings over years. You potentially lose out on many years of compounding if you pull the money out of the 529 plan only a few years after you contribute it.

Moreover, 529 plan funds are typically invested in age-based portfolios with college-age withdrawals in mind. If you tap your 529 plan for K-12 education, it may be at a time when the plan funds are being invested more aggressively (under a long-term strategy), making returns more variable.

With college costs soaring, you may be better served to find another source for private K-12 tuition while funds in your 529 plan continue to grow.

Take taxes into account

Using 529 funds for private K-12 education can be a good choice under some circumstances. Depending on your state, you may be able to contribute to a 529 plan to claim the deduction, then immediately use those funds to pay tuition. Or if you were considering selling an investment held in a taxable account to raise the funds for private school instead of tapping your 529 plan, you may face hefty capital gains taxes, says Rob Stevens, financial planning strategist at TIAA. Talk with a tax professional to explore all your options.

Also, you can potentially accumulate considerable assets in a 529 plan. Because most 529 plans have set a high bar on contribution limits, you or a loved one can contribute up to five years' worth of the annual gift-giving limit to a 529 plan in one year and avoid gift-tax liability. In 2024, that would total $90,000 for an individual or $180,000 for a couple that agrees to gift-splitting.ii If a family member such as a grandparent is looking to help defray schooling costs, contributing a large sum before the child reaches school age may help you accumulate enough to help cover K-12 and college tuition costs.

Ultimately, 529 plans can be a good option for private schools, but that may depend on which state you live in. Below is a list of states that offer a state income tax deduction or credit for K-12 private schools and allow 529 distributions to pay for it.

States that offer a state income tax deduction or credit and allow 529 plans to pay for K-12

These states offer a tax deduction for contributing to a 529 plan and allow 529 plans to pay for k-12 education.

State

Annual 529 Plan Tax Benefit
Alabama Contributions to an Alabama 529 plan up to $5,000 ($10,000 if married) are deductible.
Arizona Contributions to any
state’s 529 plan up to $2,000 ($4,000 if married) are deductible.
Arkansas Contributions to 1.) an Arkansas 529 plan up to $5,000 ($10,000 if married), 2.) a non-Arkansas plan up to $3,000 ($6,000), and 3.) rollover contributions of $7,500 ($15,000) are deductible.
Connecticut Contributions to a Connecticut 529 plan up to $5,000 ($10,000 if married) are deductible.
Delaware Contributions to a Delaware 529 plan up to $1,000 ($2,000 if married) are deductible.
District of Columbia Contributions to a DC 529 plan up to $4,000 ($8,000 if married) are deductible.
Georgia Contributions to a Georgia 529 plan up to $42,000 ($84,000 if married) are deductible.
Idaho Contributions to an Idaho 529 plan up to $6,000 ($12,000 if married) are deductible.
Indiana A 20% tax credit on up to $5,000 per year in contributions to an Indiana 529 plan can be claimed against Indiana income tax.
Iowa Contributions to an Iowa 529 plan up to $3,785 ($7,570 if married) are deductible.
Kansas Contributions to any state’s 529 plan up to $3,000 ($6,000 if married) are deductible.
Louisiana Contributions to a Louisiana 529 plan up to $2,400 ($4,800 if married) are deductible.
Maine Contributions to any state’s 529 plan up to $1,000 (any filing status) are deductible.
Maryland Contributions to a Maryland 529 plan up to $2,500 ($5,000 if married) are deductible, with a 10-year carryforward.
Massachusetts Contributions to a Massachusetts 529 plan up to $1,000 ($2,000 if married) are deductible.
Mississippi Contributions to a Mississippi 529 plan up to $10,000 ($20,000 if married) are deductible.
Missouri Contributions to any state’s 529 plan up to $8,000 ($16,000 if married) are deductible.
Montana Contributions to any state’s 529 plan up to $3,000 ($6,000 if married) are deductible.
New Jersey Contributions to a New Jersey 529 plan up to $10,000 (any filing status) are deductible.
New Mexico Contributions to a New Mexico 529 plan are fully deductible.
North Dakota Contributions to a North Dakota 529 plan up to $5,000 ($10,000 if married) are deductible.
Ohio Contributions to an Ohio 529 plan up to $4,000 (any filing status) are deductible.
Oklahoma Contributions to an Oklahoma 529 plan up to $10,000 ($20,000 if married) are deductible, with a 5-year carryforward.
Pennsylvania Contributions to any state’s 529 plan up to the gift tax exclusion amount ($18,000 for individuals and $36,000 for married couples in 2024) are deductible.
Rhode Island Contributions to a Rhode Island 529 plan up to $500 ($1,000 if married) are deductible.
South Carolina Contributions to a South Carolina 529 plan are fully deductible.
Utah A 5% tax credit on up to $2,290 ($4,580 if married) per year in contributions to a Utah 529 plan can be claimed against Utah income tax.
Vermont A 10% tax credit on up to $2,500 ($5,000 if married) can be claimed against Vermont income tax.
Virginia Contributions to a Virginia 529 plan up to $4,000 (any filing status) are deductible, with an unlimited carryforward
West Virginia Contributions to a West Virginia 529 plan are fully deductible.
Wisconsin Contributions to a Wisconsin 529 plan up to $3,860 (any filing status) are deductible, with an unlimited carryforward

Source SavingforCollege.com

Answers to five common questions about 529 plans

If you’re considering using 529 plan assets to cover K-12 education expenses, it's important to understand how they might be used instead to fund future educational expenses or even other purposes. To that end, here are answers to common questions about whether—and when—to take advantage of them.

Which institutions are 529 plan eligible?

In practice, you can use 529 plans for education expenses at almost any college or university in the United States. According to the IRSOpens in a new window, this includes any college, university, trade school or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education. As previously mentioned, it also now includes tuition expenses from enrollment or attendance at an elementary or secondary public, private or religious school (i.e., kindergarten through grade 12) up to a total amount of $10,000 per year. Finally, it also includes expenses for fees, books, supplies and equipment required for participation in an apprenticeship program registered and certified with the Secretary of Labor.

Can 529 plans be used for trade school?

Yes, 529 plans can be used to pay for education at any eligible institution, including trade schools. Since eligible institutions include those that participate in a student aid program, you can look up schools on the U.S. Department of Education’sOpens in a new window website to confirm their eligibility.

Can 529 plans be used for graduate school?

Yes, 529 accounts can be used to pay for all levels of qualified educational expenses, including graduate school.

Can 529 plans be used for room and board?

Yes, you can use a 529 plan to pay for qualified room and board expenses like rent, but certain limits and rules apply, including that any off campus living expenses can’t exceed the college’s reported cost of living figures.iii

How do 529 plans impact financial aid eligibility?

The impact of 529 plans on a student’s financial aid eligibility depends on a few variables, including who owns the plan. For example, if the student’s parent owns the account, any of its assets beyond $10,000 will reduce the student’s aid package by up to 5.64% of that value. However, if the student’s grandparents own the account, it is not included in the Free Application for Federal Student Aid (FAFSA).iv

What happens if I don’t end up needing all my 529 assets?

If you don’t have another family member who can use the funds (you can transfer 529 assets to other eligible family members), your options include:

  • Using up to $10,000 of the leftover funds to pay student loans down.
  • Rolling up to $35,000 (as of 2024) into a Roth IRA account with an owner who is the same individual as the 529 beneficiary.v
  • Paying for non-qualified educational expenses and incurring federal income taxes and a 10% penalty.i

While using a 529 account to fund K-12 expenses may seem appealing when the bills come due, it is not the optimal solution for everyone due to the various other use cases down the road and the significant tax benefits associated with them. To align your college savings strategy with your unique situation, consult your TIAA advisor and accountant.

Disclsoures

This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.

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iInternal Revenue Service, “Topic no. 313, Qualified tuition programs (QTPs),” https://www.irs.gov/taxtopics/tc313Opens in a new window. Accessed March 12, 2024.

iiKantrowitz, Mark, “Do You Have to Pay Gift Taxes on 529 Plan Contributions?” Saving for College, February 2, 2024, https://www.savingforcollege.com/article/dont-worry-too-much-about-the-annual-gift-tax-limitOpens in a new window. Accessed March 14, 2024.

iiiMert, Martha Kortiak, “529 Qualified Expenses: What Can You Use 529 Money for?” Saving for College, July 27, 2023, https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-planOpens in a new window. Accessed March 11, 2024.

ivFlynn, Katherine, “Does a 529 Plan Affect Financial Aid?,” Saving for College, December 7, 2023, https://www.savingforcollege.com/article/yes-your-529-plan-will-affect-financial-aidOpens in a new window. Accessed March 11, 2024.

vMy 529, “Secure Act 2.0,” https://my529.org/secure-act-2-0/Opens in a new window. Accessed March 11, 2024.