529 Plans for Private School

Amanda Clouser, CFA

School Bells will be ringing in only 6 weeks!

Parents, are you prepared to tackle the impending to-do lists associated with a new school year? Perhaps you are also emotionally preparing to say goodbye to a sizable tuition check!

Did you know: 529 Plans now cover K-12 expenses

As of January 1, 2018, 529 plans now allow distributions up to $10,000 per year for public, private, or religious K–12 schooling. 529 plans continue to provide tax-free distributions for college-related tuition. And, contributions into 529 plans continue to grow income tax free.

Maryland taxpayers continue to receive a maximum $2,500/year deduction each from their State adjusted gross income per beneficiary for contributions to the Maryland 529. Please note, you may not take this tax deduction if using another state's 529 plan!

Take advantage of this change:

If you are a family with young children that has budgeted for private school education, this 529 expansion may be a great way to save and accumulate tax free for those expenses.

  • When you don’t pay income taxes on growth, your account compounds more quickly and gives you more money to work with when it’s time to pay for private K–12 education or college. Check out this 529 Plan Calculator to visualize the impact of tax-free compounding.
  • Front-load the 529 plan to provide as much time as possible to grow tax-free before needed withdrawals up to $10,000/year per child per year free of federal income tax to pay for private school.  You can use the rest for college costs later.
  • If you must set aside money for private school tuition anyway, consider investing the maximum into a 529 to reap the tax deduction benefits, then withdraw it and pay your tuition bill.

Things to consider:

Decide how your family will prioritize savings for K-12 expenses with higher education needs.

  • Because money for K-12 education has a shorter time horizon than for college, you will want to consult your investment professional to ensure you invest these savings correctly.
  • If you or your beneficiary live outside of Maryland, you may have to pay state income taxes on the K-12 distributions, as not all states have signed on for the 529 Expansion. Consult your tax professional.
  • Keep an eye on changing 529 rules. States may choose to impose time limits or other criteria in response to the impact this expansion may have on 2018 tax revenues.

RCS Financial Planning is a fee-only advisor and does not sell investment products. We do not receive commissions, kickbacks, or fees of any kind for recommending 529 Plans.

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