529 Funds for Private School
Should you withdraw funds from your 529 plan for private school tuition?
It depends. I have been pondering this question for my own children, so I thought I might share some thoughts on the subject. The Tax Cuts and Jobs Act of 2017 expanded the usage of 529 plan funds to include tax-free withdrawals of up to $10,000 per year for private school tuition.
Sounds great, right? Maybe, but there are a few things each family should consider before withdrawing 529 funds to cover K-12 private school costs.
1. Has the state where you started the plan agreed to the federal change? Be sure to consult with your tax advisor before withdrawing funds.
2. How much have you saved to date? The longer the funds stay invested in your plan, the greater the growth potential.
3. How much are you paying for private school? In certain metro areas like Washington, DC, $10,000 may represent less than half of what you are paying, so is it worth it to take that money out?
4. What do you anticipate your child’s college tuition to be? A lot. This is a tough one and daunting when you look at the total cost of a private college a decade from now, for example.
5. Are you going to continue to add to the plan and, if so, how much and how often? If you are going to contribute more to the plan over time, you might feel better about taking money out, depending on the timing. Again, investments need time to grow.
As a reminder, the maximum annual gift tax exclusion per child in 2019 is $15,000, so married couples filing jointly can invest $30,000 per year per child in a 529 plan. There is also a special “front-end loading” rule that applies to 529 plans allowing you to invest 5 years of donations to one child’s plan up front.
If you had taken advantage of this option and invested $150,000 in your child’s plan at birth, you could have over $200,000 available for private kindergarten assuming a 6% annual rate of return. If you were not that well-organized and funded at that stage of your life (many of us were not), you may want to wait until high school to consider a withdrawal.
At that point, your investments will have had time to grow tax-free and you will be better equipped to answer question #4 above. Will your child want to go to a private college or an in-state university? Is there a possibility that your child could receive an academic or athletic scholarship? Or is your child showing signs of skipping college altogether to open a cannabis business in your garage?
To conclude on an upbeat note, if you are currently spending for private school for one or more children, by the time they go to college, the 529 plans will be like found money. Imagine all of the things you will be able to do as empty nesters!
Education planning is a key component of thoughtful wealth management, so please feel free to contact me at firstname.lastname@example.org if you’d like to me to model a few scenarios for your current 529 plans and related educational goals.