Private education offers valuable and exclusive benefits to the small percentage of students who attend private schools. In 2023, only 9% of K-12 students were enrolled at a private school, according to the National Center for Education Statistics.
Expensive tuition dissuades average families from pursuing private school education. The average tuition price at a private elementary or secondary school was $12,356 for the 2022-2023 academic year, according to the Private School Review.
Even with scholarships, private school tuition is more than most families can afford. However, if you start saving money for your child’s college education using a 529 plan, you can also use it to pay your child’s private school tuition—but there are some caveats.
What Is a 529 Plan?
A 529 plan is a popular tool to save for college and trade school. It’s a tax-advantaged, state-sponsored savings plan intended for future educational expenses, including college tuition.
There are two types of 529 plans:
- Prepaid tuition plans. These plans factor in today’s tuition rates at participating colleges and universities, helping your child save money in the future.
- College savings plans. College savings plans are investment accounts used to cover qualified expenses at any eligible institution, including private colleges. Your money can grow federally tax-deferred, which means your savings accumulate faster because your investment income and capital gains compound tax-free. Additionally, your withdrawals are tax-free when they’re used for eligible educational expenses. In some states, there are also benefits for contributing to a 529, such as tax credits or deductions.
529 plan contributions are considered gifts for estate tax reasons. As of 2023, individuals can give up to $17,000 per beneficiary. This total limit also includes non-529 plan gifts.
So, if you are single with two children—or grandchildren—you may gift up to $17,000 annually to each beneficiary’s account, or $34,000 total. Married couples may give jointly up to $34,000 per beneficiary.
You must report any amount over the gift limit to the IRS on a gift tax return. This excess will also apply toward your total lifetime estate and gift tax exemption.
Can You Use a 529 Plan for Private School?
Following the Tax Cuts and Jobs Act of 2017, families can use a 529 to cover expenses for their child attending a private elementary or secondary school. Under the new rules, families can use up to $10,000 yearly—per beneficiary—to pay for tuition at a private K-12 school.
Only private school tuition is eligible. Other education-related costs, such as computers or uniforms, must be purchased with non-529 funds.
State Restrictions
Some states disregarded the federal changes made by the Tax Cuts and Jobs Act. You may owe state income taxes and penalties on withdrawals from the 529 plan if you live in a state that doesn’t count K-12 tuition as a qualified expense, such as:
- California. California’s ScholarShare 529 doesn’t align with the federal expansion. The state even instituted an additional tax on withdrawals used for private education. If you withdraw from a 529 to pay for tuition at a private or religious elementary, middle or high school, you’ll owe state income taxes on the amount withdrawn and an additional 2.5% tax.
- Nebraska. If you withdraw money from Nebraska’s NEST 529 plan for K-12 expenses, the withdrawal is treated as a nonqualified withdrawal and is subject to state income taxes.
Check with your state’s education agency and 529 administrator to find out how 529 withdrawals for private schools are handled.
Are 529 Plans Allowed for Homeschool?
Under the current rules, 529 plans cannot be used for homeschooling. Any withdrawals you make to pay for homeschool expenses would be treated as non qualifying expenses and subject to taxes and penalties.
When To Use a 529 Plan For Private School
You can use up to $10,000 per year from your child’s 529 to cover private school tuition costs. However, withdrawing money while your child is in elementary or high school may deplete the account before college comes around.
As such, parents should be intentional with 529 funds and use them in one of the following scenarios:
- You have a large sum of 529 funds saved. If you or your extended family have made regular contributions to a 529, your child may have plenty of money to pay for college. In that case, you can access the 529 to cover private school tuition and still have enough to pay for college after high school.
- Your child qualifies for significant gift aid. Some students are eligible for large amounts of gift aid based on academic merit and other accomplishments. For example, if your child is a gifted student or a talented athlete, they may be eligible for full scholarships or grants that cover their tuition—meaning they may not need all of the money in the 529 for college. In that case, using it for private school can be a smart alternative.
- Your child may not attend college. If your child has other plans, such as starting a business or another career path, using the 529 to pay for private school can be a good way to make sure their education costs are covered.
How To Make a 529 Withdrawal To Pay for Private School
If you’ve decided to proceed, you can make a withdrawal to pay for private elementary, middle or high school in three steps:
- Double-check state regulations. In some states, K-12 tuition isn’t a qualifying expense. So, you may owe state income taxes or penalties on the amount you withdraw. Review your state’s rules to see if there are any special conditions or restrictions.
- Contact the school financial aid office. Call or email the school’s financial aid office to ensure your child has been considered for all financial aid options, including scholarships and tuition assistance programs.
- Request a withdrawal. Once you determine how much of the tuition you’re responsible for, you can request a withdrawal from the child’s 529 plan. Depending on the plan, you may be able to submit an online request through the plan’s website, or you may need to call the plan administrator. You can usually have the administrator send the money directly to the school, or you can opt for the money to be sent to the beneficiary or account owner.
Withdrawing money from a 529 can have tax implications, so it may be wise to consult with a tax professional before requesting a withdrawal.
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