Using 529s for K–12 costs: Five things to consider

Tax reform has expanded the scope of 529 plans. Is your saving strategy ready?

Using 529s for K–12 costs: Five things to consider

Time to read: 3 min

529 savings plans aren’t just for college anymore. Due to changes in federal tax law passed by Congress in 2017, families with children in grades K–12 can now take federal tax-free withdrawals of up to $10,000 a year to pay for tuition at an elementary or secondary public, private or religious school.1 Whether K–12 tuition will qualify for state tax benefits is determined on a state-by-state basis.

This can be a valuable benefit for many families — contributions to a 529 account grow tax-deferred, and withdrawals are tax-free as long as they’re applied toward qualified educational expenses.1 But, making sure your money can potentially last from the first day of kindergarten to the last day of college requires a diligent and consistent saving strategy. Otherwise, families may find themselves with a shortage of college funds after using their savings on elementary through high school costs.

Below are five things to keep in mind as you consider using 529 funds for your little ones.

1. It’s more important than ever to start early.

On average, families open 529 accounts when their children are 7 years old, according to Ascensus, a leading administrator of 529 plans.2 That gives families roughly 10 years to save for college, but far less time to save for private K–12 costs.

Ideally, parents would immediately open a 529 plan for their new baby. Or, for those who really believe in planning ahead, you could open a 529 plan in your own name years before you even have kids, build the account balance over time, and transfer the account to your child when he or she is born. (If you’re worried about saving too early, remember that you can keep or rename yourself as the beneficiary and use the funds to pursue your own education at any time.)

2. Consider increasing your contributions.

Let’s say you do open a 529 account for your child at birth, and make monthly contributions of $100. By the time your child turns 18, the account would have around $50,000 (assuming a growth rate of 8%). But if you tap those funds for K–12 expenses along the way, you could easily run out of money before college. If paying for private school is a priority for you, look for ways to maximize your contributions and get the most out of your account.

3. Encourage family members to contribute.

Anyone can contribute to your child’s 529 plan, or they can even open a 529 themselves with your child as the beneficiary. The most logical place to start the search for contributors is grandparents. A 529 can help them with legacy and estate planning by allowing individual contributions up to $15,000 per year (or $30,000 for a married couple) with no gift tax — or a single contribution up to $75,000 per beneficiary (or $150,000 for a married couple) that is treated as if it were spread over five years.3

 4. Make sure your investment matches your time horizon.

Many 529 plans feature age-based investment options — simply choose the year when your child is expected to graduate, and the fund’s mix of stocks and bonds automatically becomes more conservative as that date draws closer. But if you’re saving for elementary expenses in the same account as college expenses, you may need to assess your investment strategy. Other types of funds also provide exposure to a mix of stocks and bonds, but are static — letting the investor decide when to be more growth-oriented and when to become more conservative. Dividing contributions between different fund types might be a consideration for some investors. Your financial advisor can help you assess your particular plan’s options for investing your 529 funds over a wider time horizon.

5. What about the Coverdell?

Coverdell Education Savings Accounts (CESAs) have long been used to save for K–12 expenses as well as for college. But there are some important differences to consider between CESAs and 529s that K–12 savers will want to closely examine. For example, the maximum investment in a CESA is $2,000 per beneficiary per year, from all sources, while the maximum investment in a 529 can be in excess of $300,000 per beneficiary, depending on the plan. In addition, there are no income restrictions for investing in a 529, while the ability to contribute to a CESA phases out for income between $95,000 and $110,000 (for single filers) or $190,000 and $220,000 (for married couples filing jointly).

Learn about more differences between various types of savings plans.

Talk to your advisor

Using a 529 plan to pay for K–12 expenses can be a great benefit for families, but it requires careful planning to make sure the account can potentially keep pace with several years’ worth of educational costs. Talk to your financial advisor to make sure your saving strategy is tailored for your goals, and consult a tax advisor for specific questions about your federal and state taxes.

1 Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements, and certain withdrawals are subject to federal, state and local taxes.

2 Source: Ascensus College Savings platform, as of Dec. 31, 2016

3 If the contributor dies during the five-year period, a prorated amount will revert back to the contributor’s taxable estate. For more information, refer to Internal Revenue Service Publication 970. Contact your tax professional about your individual situation.

Important information

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Thomas Rowley

Director, Retirement and Education Strategies

Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at in addition to his speaking engagements.

Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.

Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.

Mr. Rowley has been director of retirement business strategy since 2010. Prior to joining Invesco in 2010, he was in charge of individual retirement plan products and Retirement Marketing at Van Kampen.

Prior to joining Van Kampen in 1996, he was a 401(k) regional sales director with an investment firm. His experience also includes seven years in retirement plan operations and three years as head of a brokerage firm’s retirement help desk. He began his career in the Treasury bond futures pit at the Chicago Board of Trade.

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