Using 529 Plans to Pay for Private K-12 Expenses

The Tax Cuts and Jobs Act introduced legislation that could benefit those with 529 plans in place to pay for college. Under the new law, up to $10,000 of 529 plan assets can now be withdrawn for K-12 tuition costs for each of the plan's named beneficiaries. There is one caveat: since state entities are responsible for the administration and issuance of these plans, all states have not gotten on board to comply with the new change.

Dealing With the Issues

There are several issues surrounding this change. Some factors could interfere in states that have been unable or do not want to comply. First, since this is a legislative directive, certain states must amend their laws and tax codes to allow these types of withdrawals. This could take years to accomplish. Additionally, any associated tax breaks would cut the state's revenue from these plans. This leaves room for another question—if there are any investment gains, will they become taxable at the state level?

While additional questions need to be raised and answered, making this plan available at the K-12 level has some positive benefits. Under current law, 529 plans can also be transferred to 529 ABLE accounts to assist with education expenses for special needs children.

Areas of Concern

Additional clarity is needed to fully understand what can and cannot be done under this law, as it affects each state differently. An area of concern is account holders taking a significant financial risk when attempting to withdraw money. The ideal would be to keep all the current benefits of saving in this type of account while utilizing those funds for K-12 tuition.

Although 529 plans were developed under federal law, many states have developed their own versions of the 529 plan. The inconsistencies between the two can cause many problems, such as families having to pay back any tax credits they have received. This also affects the deductions. As states are in charge of their own plans, the impact affects each one differently. Also, as states stand to lose money by allowing these types of withdrawals, how will they recoup the revenue lost?

Is this a good idea? For some families who have front-loaded money into a 529 account at the child's birth, this could help save thousands based on the ROI each year. Also, if used as a just-in-time pass-through by contributing to the plan, getting the tax benefit, and immediately withdrawing to pay for the tuition, it could be a good idea. While some states do not allow this, some do.

As this continues to develop, it is important to follow what each state is doing in response to the change. They could add income restrictions or cap deductions, which would have implications that would affect the benefits of using this to pay K-12 tuition.

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