529 Plans Will Allow Private School K-12 Tax-Free Withdrawals

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529Starting in 2018, qualified educational expenses for 529 plans will include up to $10,000 a year in tuition and expenses for primary and secondary school expenses (public, private, or religious). Previously, you could only use it towards qualified college expenses. There were also some related changes to ABLE accounts for individuals with special needs – listed here.

Put simply, you can now pay for up to $10k a year of private K-12 school through a 529 plan. If this impacts you, you may consider making a 529 contribution now before December 31st, 2017 as you are allowed annual contributions of $14,000 per person ($28,000 per couple) while still avoiding gift taxes. You would then be able to make contributions in both 2017 and 2018.

Front-loading a 529 early and with a lot of money. The NY Times lays out a scenario where a wealthy family puts in $200,000 at birth (not sure why they use this amount as it would exceed annual gift tax limits even with front-loading) and then uses the money to pay for K-12 private school. This could theoretically save a wealthy family $30,000 in taxes.

If you have that kind of money, it may be worthwhile to explore front-loading, but be careful as their example assumes a reliable 6% return every single year. In the real world, investment returns can be quite volatile, and if you make a $10,000 withdrawal every year, you run the risk of depleting your account entirely before college. Other possible options are to start funding a 529 even before your child’s birth to start accumulating those future tax-free capital gains.

Using the 529 as a just-in-time passthrough. Around 30 states offer a in-state tax benefit on 529 plans. If you are paying for a private school anyway, you may be able to save some money by simply using the 529 as a passthrough account. Contribute to 529, grab the tax benefit, and then immediately withdraw (starting in 2018) to pay for K-12 tuition. Some states like Montana and Wisconsin specifically disallow this in-and-out practice, but most do not (although they could start).

Things can still change. This Reuters article points out that states may change their own laws in response. They could add minimum holding periods, cap their deductions, or add income restrictions. I am also curious as to what, if any public school “expenses” are technically eligible.

Personally, I don’t think this will change my 529 usage plans significantly. My state does not offer a tax benefit, so there is little benefit to the passthrough option. Maybe if short-term rates go up high someday and you can earn 5% in a bank account, it might become worth the effort to park some money in there temporarily. The other primary benefit is federal tax-free investment gains, and it takes a while for that compounding action to accumulate. If I get lucky and my balance gets really big, I could perhaps see taking some money out before college if they end up in private high school. Realistically though, I doubt my balances will greatly exceed four years of college tuition (times three kids!).

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  1. This is pretty exciting — I don’t think I’ll live in a Coverdell state in the future and would like my kids to have the opportunity to go to private school. Hopefully they’ll get into one of those super good public schools, but if they don’t, hey, I need options! I can always save it until they go to college. I’m always amazed at the tax deductible plans we have in the US. It’s kinda awesome.

  2. I did not know about this; thank you for sharing! We currently have our daughter in private school, so good to know.

  3. Isn’t the whole purpose of a 529 was to save it, let it grow/compound, and then use it for your kid’s college? I guess if you can superfund it at the start (and your child is very young), it may be worth the tax benefits, but I don’t know.

  4. I’m trying to figure out what state plans don’t have a holding period. I was trying to find this information on savingforcollege.com but I can’t seem to find this specific information. Would you by chance have a resource for determining this information or advise where exactly it is listed on savingforcollege.com?

    I’m in MO and can contribute to any states plan and still get my state deduction for the 529. I’m considering opening 2 new accounts for my kids and using those for private school tuition and keep their existing accounts for college (and asset allocation purposes). The new accounts would just be used as a pass thru to qualify for the state tax deduction on the very near term private school tuition in a money market (or equiv.) type investment.

  5. Though I have been following your site for many years but this is the first time i am actually acting based on your post .opened 529 account yesterday and posted money into it today . thank you for all the good info.

  6. I had that exact same thought reading that NY Times article: “$200k?!? You can’t do that!” Running the numbers with $140k, $70k, or $28k/$14k per year every year would have been more informative and realistic.

    Unless you were fortunate enough to put in $140k the day your child got a SSN, I honestly don’t know how this is going to be very advantagous – especially in my state that doesn’t have a state tax deduction for 529 contributions. If you start private school around age 4-5 and go all the way through to 18, and then beyond to college, you’ll be pulling out money as quickly as you contribute it, so there won’t be much benefit of tax-free growth within the account. The idea requires a large initial bolus to be of much benefit.

    I think the real story to this 529 is generational wealth transfer. This opens up the ability of wealthy older parents to open large 529s that can then be transferred down the generational ladder without penalty while growing free of taxes. As the NYT article points out, if you have >$300k in one of these accounts you can essentially perpetually use the tax free growth for education expenses without much hurting the principal. (Though each plan usually has a max limit, around $400k)

    • The idea of the wealthy being able to now basically make a perpetual educational endowment for future generations is an interesting point, I hadn’t thought of that. It also makes it faster to take more money out, for example if the kids don’t use all the 529 funds, it would only be maybe another 10 or 15 years before the grandkids could use it.

  7. John, I am planning to open a 529 plan for my kids. Any recommendations or just do it where i have my primary banking? Thanks

  8. Jonathan,
    Do you have any current promo code for the ohio 529 plan, I know you use to publish those codes earlier..

  9. Hi. Pretty happy about using 529 for Catholic School. I see that Maine will be considering whether withdrawals used for K-12 can have tax free earnings. Seems counter productive. Thoughts?

    • I see this from the Maine NextGen website:

      Maine taxpayers should be aware that Maine law currently provides that the earnings portion of a withdrawal is tax free if it is used for “higher education expenses”. Higher education expenses under Maine law is defined as “expenses for attendance at an institution of higher education as those expenses are defined by rule of the [Finance Authority of Maine] consistent with applicable provisions of the Internal Revenue Code and its regulations addressing qualified state tuition programs.” Although the recent federal legislative changes include the elementary and secondary education expenses noted above in the definition of “qualified higher education expenses”, thus exempting the earnings portion of withdrawals for such a purpose from federal taxation, it is not clear whether such favorable tax treatment will apply under Maine law. The matter is expected to be taken up by the Maine Legislature for clarification in 2018.

      So you’ll get it federally-tax free for sure, but Maine is not sure yet if it is Maine state-tax free. Hopefully they will clarify soon to make the decision easier for parents. Does Maine have large state capital gains tax?

  10. I live in Arizona. Our oldest daughter just started high school. I am amazed by the number of fees there are for classes here in the public schools. Engineer has a $25 elective fee, Drama has a $15 elective fee etc. There are also fees to rent a locker. These add up quickly over the course of four years especially if the parking permit is an eligible fee. We have not invested in the AZ 529 plans because the investment choices are poor. We use Nevada and NY plans currently.
    Most school in AZ offer many dual enrollment high school / college credit courses. The college enrollment is with the community college Rio Salado. As a freshman our daughter has one class but next year she will have three. To participate we pay tuition to Rio Salado ($84 per credit). With nine credits next year this will add up. Since this is college tuition it seems there is no issue with using 529 money that can potentially be free of state taxes if we start using the AZ State plan.

    Most of the dual enrollment classes are also AP classes. Students can take them as AP classes and take the AP tests at the end of the year for college credit. The cost is currently $94 for the exam and your score determine if and how much college credit you get. You can also dual enroll in these classes for $84 * 3 or 4 credits. Then as long as you get a passing grade for the class you get college credit at any college that accepts Rio Salado credits. The guidance counselors suggest doing both so you have the most options for credit. This can get expensive.

    Do you know is test fees for SATs, AP, etc exams can be paid from a 529? What about college application fees? If all of these are allowed, using an AZ state 529 as a pass through for these expenses has the potential for savings.

  11. Could I put 2k in a 529 plan and then contribute monthly while my kids private school takes monthly payments of 700 out for tuition or do I have to pay the whole yearly tuition of 8k at once from the 529?

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