The quality of education that your child receives will likely have a significant impact on his or her future success. Since quality usually comes at a financial cost that means the need for significant savings to pay for your child’s education, particularly if private school is involved.
One of the most popular ways of saving for education-related costs is a so-called 529 plan. These plans are basically mutual funds that invest on behalf of a specific child, where the earnings they generate accrue on a tax-free basis, as long as they are used for qualified education expenses. While it has become commonplace for people to fund 529 plans to start saving for college as soon as their children are born, what you might not know is that such accounts can now also be used to help fund primary education costs.
While many people choose to move to a higher tax zip code boasting top-rated public elementary and high schools, there are reasons that public school isn’t the best option for everyone. Many people choose to put their children into private schools beginning as early as preschool. Roughly 10% of children within the U.S. receive their primary school education from private institutions, according to the Council for American Private Education –schooling that doesn’t come cheap. According to Private School Review, the annual cost of private school within the U.S. averaged $10,671 for the 2018/2019 school year –with private elementary schools coming in at $9,631 per year and private high schools averaging $14,575 per year.
As part of the 2018 tax reform bill, the tax-free benefits of saving within 529 plans were expanded beyond secondary education expenses to include primary education costs. Now, parents or guardians have the ability to make tax-free withdrawals from a child’s 529 plan up to $10,000 per year to pay for primary school tuition expenses. Unlike 529 money used for secondary education costs that can include textbooks, computers and even certain day-to-day living costs, however, tuition is literally the only thing such withdrawals can legally be used for when it comes to primary school costs. As with all things related to U.S. tax code, whether or not this right extends to your child’s 529 plan depends on where you live. That’s because 529 plans are administered by states, and only certain states have altered their laws to match the new federal law.
Before you pull money from your child’s 529 plan to pay for primary school costs, be sure to CHECK HERE FIRST to see if you are able to do so in the state where you reside, as withdrawing money if you are not allowed can trigger penalty fees and could potentially even leave you paying additional taxes on that money.
Just because you can use 529 money for primary education costs doesn’t necessarily mean you should. Keep in mind that any withdrawals from your child’s 529 plan will reduce the overall amount within their investment portfolio and will ultimately reduce the impact of compounded growth within their account.