Are 529s the Secret Weapon in Your Family’s Financial Plan?

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Do you pay K-12 private school tuition? If so, did you know that you can “pre-pay” part of your child’s private school tuition in a way that grows tax free by front-loading their 529 plan?

Check out this financial hack for parents! It’s a smart way to put the 529 vehicle to good use before your kids even know what the SAT is.

When it’s time to pay K-12 school tuition, consider running the funds through your student’s 529 plan first. Depending on your home state’s 529 plan rules and how much you contribute to the fund per year, back to school could be your next opportunity for a state tax break. Here’s why:

  • Many states offer tax deductions for 529 plan contributions. In Georgia, it’s $8000 per couple annually.
  • Most states don’t require you to keep funds in the 529 plan for any specific amount of time before taking a qualified distribution.
  • In addition to paying for college, these accounts allow you to distribute up to $10,000 annually per child for qualified K-12 tuition.

Depending on how aggressively you can frontload your child’s 529 plan, you could leverage this fund for both college savings and qualified K-12 tuition expenses.

For example, let’s say you have a first grader at Trinity in Atlanta, where tuition is $30,000 a year.  Each year, you can pull $10,000 from your child’s 529 plan without penalty to knock out a third of that tuition before dipping into your annual household income.

If you consistently fund your child’s 529 plan beyond the $8000 a year tax deductible amount, you’re essentially pre-paying tuition in a way that can grow tax free until you’re ready to use it. Funds for college can remain in the account and continue growing until they’re needed.

This dual education funding strategy can be especially powerful if you have family members bolstering your child’s 529 plan. The annual gift-tax exclusion is $15,000 per donor to an individual in 2022. As a couple, you may gift up to $30,000 per year to a child without gift tax implications.  That means grandparents can contribute up to $30,000 per child, per year directly to a 529 plan.  The earlier in your child’s life those contributions are made, the longer the funds can grow tax free.

529 plans offer an array of other benefits and are an often overlooked component of household net worth.  Whether you’re focused on primary education as a pathway to college or keeping your eyes on the prize of your child’s university years, consider how a 529 plan factors into your family’s overall financial plan.

529 Plan FAQs

Q: Are 529 distributions subject to tax penalties?

  • Qualified college expenses are not subject to Federal taxes and, in most cases, are exempt from state taxes.
  • Qualified K-12 expenses up to $10k are not subject to Federal taxes. In most cases, they’re also exempt from state taxes.
  • But, since some states have unique rules for 529 distributions, it’s always best check with your tax advisor.

Q: Can I use 529 distributions to pay for books and computers for K-12 expenses?

  • Qualified education expenses for K-12 only include tuition.

Q: Can I use 529 distributions to pay for preschool expenses?

  • If you’re footing the bill for private daycare, consider a Dependent Care FSA plan to help save federal taxes on preschool and childcare expenses.

Q: If my child lives off-campus in college, are his room and board considered “qualified expenses”?

  • Yes! This is a very misunderstood rule, but off-campus room and board expenses are qualified up to an amount as long as certain criteria are met:
    • Student must be enrolled at least half time (as defined by the school)
    • Expenses do not exceed the university’s off-campus housing allowance (check the university’s website for the amount)
    • You are able to provide proof of the expenses (so save your receipts and bank card statements!)
    • Reimburse yourself during the year of the charges; for example, you cannot reimburse yourself in February for your fall semester expenses.

Q: Does my child have to attend school in the same state that sponsors the 529 plan?

  • No, you can open a 529 account in any state and use the money to fund education at any school.
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