529 plans offer many benefits, leaving some to wonder if they can use these funds for other forms of education. Learn more with Sootchy.
Although saving for college is one of the biggest obstacles many parents face, a private elementary or secondary education is just as important – and, at times, expensive – for some families across the country. While the cost of tuition may be lower, even a few thousand dollars a year adds up quickly, leading the parents and family members of many future elementary school students to look for ways to cover the expense. A 529 plan is one option that’s been gaining popularity since the passage of the Tax Cuts and Jobs Act of 2017, which included a provision expanding the acceptable uses of 529 funds to include forms of education aside from traditional colleges and universities. So, can a 529 plan pay for private elementary school? To find out, keep reading as the experts at Sootchy provide the answer.
As often as not, 529 plans are known by another name, one that suggests a specific use: college savings plans. Despite this moniker, 529 plans actually come in several forms and have a wide variety of uses. Prepaid tuition plans, for instance, come with relatively strict limitations on how funds can be used, so they may not cover the cost of a private elementary school, while education savings plans allow for more flexibility with the use of funds. This flexibility includes the option to use your 529 plan to pay for private elementary school, so if you have a 529 education savings plan (or ABLE account), you can put some of those funds toward your child’s elementary education.
While the addition of more applications for 529 plans can certainly help parents pay for a private elementary school, there are limitations on the amount of money that can be spent in this way. In the case of college tuition, account holders use any amount of money from a 529 plan, but distributions for private elementary school education cannot exceed $10,000 per year. Beyond that number, any funds withdrawn from the account will be considered “a non-qualified distribution” – the IRS term – and trigger income tax on any earnings spent, as well as a 10% penalty.
In addition to the upper limit set on expenditures, there are also restrictions concerning what 529 funds are used for. Although parents face a variety of costs related to a private elementary school education – such as uniforms, housing, and transportation – 529 funds can only be put toward tuition and any mandatory fees the school might impose; any other use will be considered non-qualified and lead to the penalties described above.
Using the funds in a 529 education savings plan or ABLE account to pay for private elementary school is a fairly straightforward process. All you’ll need to do is withdraw the necessary funds from the account – which can happen at any time – and use them for a qualified education expense (i.e., tuition and fees). There’s currently no mechanism in place to check that your payment follows the rules governing 529 plans in real time, so there are no extra steps before the money is spent.
It’s worth noting, however, that the federal government enforces the rules surrounding 529 plans in the same way it does other tax issues: through an IRS audit. Any account owner who breaks the rules and spends money from one of these accounts on a non-qualified distribution without paying the corresponding tax and penalty may face steep fines as well as other unpleasant consequences. For this reason, be sure to keep a record of your child’s education expenses, such as copies of tuition bills, to prove that your use of the account is above board in the event of an audit.
With all the tax benefits they offer, a 529 plan can be an attractive tool for covering education expenses at any age, but parents looking to spend money from a 529 account should keep in mind the abbreviated timetable when choosing their investments. Many of the portfolios available through states’ 529 plans are designed to maximize earnings over more than a decade, since it’s assumed that account owners will be saving from the time the beneficiary is very young until they reach age 18, which most kids go off to college. If you are looking to start withdrawing from the account when your child is 5 or 6, however, you’ll have far less time to let your contributions generate earnings.
So far, there are few, if any, 529 investment options designed for use at the elementary or secondary school levels, but most 529 plans let account holders manually select and customize investments as part of a static portfolio (as opposed to an age-based portfolio). If you’re looking to get a substantial return on your investment in a 529 plan by the time your child enrolls in a private elementary school, you may want to choose a more aggressive investment option. These portfolios tend to provide better returns, but the more aggressive the investment, the more risk it entails – an important point to remember when opening your account.
For many parents, ensuring a good education for their child is a fundamental responsibility, though it’s one that doesn’t come cheap. To help cover the costs, consider opening a 529 plan and taking advantage of its many tax benefits. To learn more about the basics of 529 plans or open an account, visit Sootchy online or download our app today.