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.