Paying K-12 Tuition with a 529 Plan

Welcome to our first installment in a series where we’ll explore the financial planning implications of the tax law. With bills from private K-12 schools arriving in January, we’ll start with the expansion of the qualifying uses the 529 to include pre-college tuition. The news of this expansion has many parents excited, but let’s take a closer look at where the opportunities from this expansion do (and don’t) actually exist.

The Basics:

1. The law allows a maximum of $10,000 per year, per child, for K-12 tuition expenses.
2. The final bill did NOT include home school expenses, as originally planned.
3. Most states do not offer a state tax deductions on 529 contributions. And for those that do, the deduction can be somewhat limited. For instance, in Massachusetts to largest tax break  available is $102 (5.1% of the first $2,000 contributed).
4. The big advantage of the 529 is that investment growth is tax-free, as are distributions provided they are used for a qualifying purpose.

Plan Carefully:

1.  Unless you live in a state that offers a generous state tax deduction for contributions, there’s little benefit to funneling payments for current expenses through the 529. In fact, to make any reasonable assumption that there will be growth in the account, you need an investable time-horizon to avoid losing money! Depending on the risk tolerance of the parents, the first year of school to reasonably consider making deposits for today is three to six years out.
2. Age-based portfolios are popular inside 529 plans and for good reason. The allocation automatically becomes more conservative (bond and cash heavy) as the child approaches the age at which a tuition is due. But proceed carefully when electing portfolios for pre-college tuition! These portfolios were originally engineered with the start date of COLLEGE as the objective. If you’re using an age-based fund for a pre-college education expense, you’ll need to adjust the student’s age for a plan like the UESP or year for which the money is allocated in Massachusetts U.Fund.

Drop us a line with questions or for additional information. Up next: “Charitable Giving in a High Standard Deduction World.”