getting through the first day of kindergarten

How Tax Reform Makes Section 529 Plans Available for Private School Grades K-12

6 July 2018 by Lilja Murto

The Tax Cuts and Jobs Act enacted near the end of 2017 enhanced the usefulness of a savings plan designed to help pay for the cost of education. The qualified tuition plan (QTP) was formerly available only to cover the expenses of college-level students. Parents of elementary and secondary school students may now use the tax-free earnings from a QTP to pay for tuition expenses.

A QTP is more commonly referred to as a 529 plan, named after the Internal Revenue Code section which authorizes the accounts. For a college student, a 529 plan can be used to pay for an array of education costs, including room and board. For a younger student, however, a 529 plan is limited to the payment of tuition. As a result, the tax change is most effective for parents who would like to send their children to a private elementary school.

Emphasis on tax-free earnings

Although 529 plans are defined by the Internal Revenue Code, the plans are administered by the individual state governments. There is no up-front tax deduction for funds placed in a 529 plan. The main advantage of a 529 plan is that account earnings are tax-free if used for qualified education expenses. For that reason, it may take a few years to realize a significant tax advantage from a 529 plan.

Choosing between plans

Now that elementary school students can benefit from a 529 plan, it becomes more important than ever to consider funding an account as soon as possible. You don't necessarily have to use the 529 plan in your own state of residence. You can select a specific plan after comparing the various state offerings. Contribution limits vary from plan to plan, but there is a natural incentive not to contribute more than your child's qualified education costs.

Avoiding the penalty

You can withdraw up to $10,000 per year from a 529 plan to pay private school tuition. The return of your original contribution is not taxed again. Withdrawn earnings not used for qualified education expenses are generally taxable, although there are exceptions. Any taxable earnings from a 529 plan are also subject to a 10 percent penalty.

Funds that remain in a 529 plan after your child completes elementary school may be used later during secondary school or college. Some states provide an up-front tax deduction for their own residents who invest in that state's 529 plan. Contact an independent elementary school for more information on tax-advantaged education plans.

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