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Paying for K-12 Tuition with 529 plans
Parents are faced with many important decisions when it comes to their kids and money. For many, saving for college is a primary concern. Providing a college education is a meaningful gift parents can provide their kids.
Some parents also choose private or religious schools as a way to help their kids excel, get individual attention, or learn values of faith that are important to their families
Many people are aware that 529 plans help with saving for a college or other post-secondary education because they offer tax advantages when used for qualified expenses. As of this year, these same plans can be used to cover some kindergarten through 12th grade tuition beginning in January of 2018. Account owners can now withdraw up to $10,000 tax free in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.1 Homeschool expenses do not qualify. It is important to note that in the case of a K-12 withdrawal, tuition is the only qualified expense. Other related expenses, such as books and computers, do not qualify at the K-12 level. Non-qualified withdrawals are taxable as ordinary income to the extent of earnings and may also be subject to a 10% federal income tax penalty.
As with all major financial decisions, there are things to consider before making the determination to use a 529 plan to pay for primary school. Each investor has different needs and risk tolerance, so there is no one-size-fits-all option. Investment returns are not guaranteed, and you could lose money by investing in a 529 plan.
The Cost of Private Schools
The current average cost for a private elementary school is $9,398 per year. The average cost for a private high school is $14,205.2 Based on these averages, the approximate tuition cost of a private K-12 education is $141,402 per child. Keep in mind that the new 529 benefit only covers tuition up to $10,000 a year and not the cost of additional expenses such as books, uniforms, activity fees, or transportation. Also, consider if there will be enough funds to cover college costs once the student graduates high school. The average cost of an academic year at an in-state public college for the 2017-18 year was $25,290, while a private college was $50,900.3
When to Start Saving?
Investors can begin saving for a child’s education at any time. In creating your 529 investment plan, there is much to consider. How old was your child when you started investing? How many children do you have or plan to have? Will they attend private elementary school? Private high school? The earlier you ask yourself these key questions, the easier it will be to determine your savings plan.
How Much Can Be Saved?
Investors can contribute $15,000 per year or $30,000 for married couples who are filing jointly. Contributions can be accelerated to $75,000 or $150,000 for married couples once per 5-year period without federal gift taxes. West Virginia’s 529 limit for all account balances for the same beneficiary is $400,000.
What Does it Mean?
An investor should consider if the new $10,000 K-12 tuition benefit is worthwhile in each individual circumstance. An advantage of 529 plans is that they grow tax-free over an extended period of time. The longer funds are invested, the more they have the potential to grow, increasing the tax benefit. If possible, investors should consider contributing a large amount of money up front. The sooner that the tax-free funds need to be withdrawn, the more the investment needs to be front-loaded with a higher starting amount. Investors needing quicker access to their 529 funds might also consider a more conservative portfolio typical of shorter-term investments. For K-12 education, investors can withdraw up to $10,000 per year, per child, free of income tax. Remaining funds can be used when the child goes to college. For post-secondary education, funds must be used for qualified education expense, only. Otherwise, they will be subject to state and federal income taxes and an additional federal penalty on earnings, according to the Securities and Exchange Commission.4
To make the most of your 529 plan and create the education savings goals for you and your family, get started today.
IMPORTANT DISCLOSURE: Hartford Funds does not provide tax advice. Investors should work with a financial intermediary to select an appropriate investment option based on the investor's goals, particularly if the investor is considering using the assets for K-12 tuition. The SMART529 investment options were designed for saving for college, particularly the Age-Based Portfolios. Certain Portfolios may be more appropriate for saving for K-12 tuition than others.
1 https://www.congress.gov/bill/115th-congress/house-bill/1. Accessed October 2018.
2 Private School Review, national averages for private elementary and high schools for 2018-19. Accessed October 2018.
3 www.collegedata.com. Accessed October 2018.
4 SEC’s Office of Investor Education and Advocacy, Investor Publications, May 2018. www.sec.gov. Accessed October 2018.