New Tax Law: Paying for private school with a 529Submitted by Financial Planning Solutions, LLC on March 8th, 2018
With the new tax law one of the greatest savings vehicles for college just got even better. Starting in 2018 there is a new provision permitting withdrawals from 529s for qualified education expenses for elementary and secondary schools. Previously, qualified withdrawals were only available for education expenses at colleges and universities. Now families can use up to $10,000 per year for a child’s public, private, or religious education expenses before they enter college.
For families with overfunded 529 plans, this may be a welcome loosening of the withdrawal options. However, this option comes with risks: If these new withdrawals consume too much of the 529, it may leave the student with insufficient funds to pay for college when the time comes.
In addition, if the investments in the 529 decline during the pre-college withdrawal period, it could significantly reduce the value of the account. Effectively, you’d be reducing the base that you’d be counting on to grow the account for college—a type of negative compounding effect on the account. This means carefully planning pre-college and college costs becomes even more important to ensure adequate funding for these large expenses.
For families with underfunded 529 plans, withdrawing funds before college could put an already tentative nest egg at higher risk of running out of money before college is completed. That said, there could be circumstances when this type of early withdrawal strategy might make sense. For instance, the student might be better positioned academically after completing several years at a prestigious private high school to apply to certain colleges that are seeking high achieving students. As a result, the student might be offered significant academic scholarships or grants.
For families with young children who are planning to send their child(ren) to private school, this new provision significantly increases the need to save even more into a 529 and to start saving early!
As you can see, making these decisions has only gotten more complicated.
Still have questions about paying for private school with a 529, give us a call. We’re here to help.
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