If you’re a parent saving for college, you may be using a 529 college savings plan. These plans, also known as Qualified Tuition Programs (QTPs) are named after section 529 of the federal tax code. The purpose of these plans is to allow families to set aside money for higher education expenses, including tuition, fees, room and board, and computers—however, the Tax Cuts and Jobs Act of 2017 permits up to $10,000 in a 529 college savings plan to be used for K-12 tuition each year.
How Do 529 Accounts Work?
If you own a 529 college savings plan account, you can make contributions to your account each year and accrue earnings based on the investment portfolio as determined by your state-sponsored plan. Earnings in the account accumulate tax-free, and when you take a distribution from the account, you are not taxed as long as the money is used for qualified education expenses on behalf of the beneficiary.
How Can I Use a 529 Account to Pay for K-12 Expenses?
With the new tax law, you can now take a distribution from the account of up to $10,000 to pay for K-12 tuition. Although the 529 college savings account can be used to pay for a variety of college expenses including tuition and mandatory fees, room and board, computers, and books, 529 distributions for K-12 can only be used to pay for tuition at public, private, and religious schools.
Check With Your Plan Before Paying K-12 Tuition With Your 529 Account
The Tax Cuts and Jobs Act specifies that 529 distributions used for K-12 tuition up to $10,000 will not be taxed as income, but some states have not yet adopted these modifications to state law. As of now, using 529 distributions for K-12 tuition will not be subject to federal tax or penalties. However, the distribution may still be subject to state penalties until local law is changed. Also, the state may be entitled to recoup state tax deductions for 529 contributions in previous years if you use for 529 plan for K-12 expenses before it’s approved in your state.
Check with your plan administrator before using a 529 account to pay for K-12 tuition. Nebraska, Iowa, and Maine are just a few states that issued initial warnings that federal changes to 529 plans for K-12 tuition may not be adopted immediately. The state of Maine issued a November 2018 press release announcing Maine’s adoption of 529 plans for K-12 tuition almost one year after federal approval. While other states, such as Utah, have already declared that the paying K-12 tuition with the My529 plan is approved as of January 2018.
What if I have Children in College and K-12? Can I use the Same 529 Plan?
If you have children in college and K-12, you may be wondering if you can use the same 529 plan to pay their expenses. Each child must have their own 529 plan, but you may be able to transfer money between accounts. For example, if your oldest is graduating college, you can transfer any remaining funds in the oldest student’s 529 account to their sibling’s 529 account. You can also change the beneficiary on that account to a sibling or other eligible relative.
A Final Word on Using 529 Distributions for K-12 Expenses
While the Tax Cuts and Jobs Act brings much welcome flexibility to 529 plans, it’s important to take some precautions before using it to pay K-12 tuition. Talk to your plan administrator to ensure that the plan has approved K-12 tuition as a qualified expense. Also, discuss tax laws with your local tax professional and possibly a tax professional in the state where your plan is held (if it’s in a different state) to determine possible deductions and penalties for using the 529 plan for K-12 tuition.