According to the Council for American Private Education, about 10% of children attend private schools. If you’re one of the parents whose child is enrolled in a private education facility and want to use your existing 529 plan to cover their tuition, there are a few more things to be wary about.
529 plans are often administered by the states. Since the new law was passed, not all states have updated their tax codes to align with the federal governments. Some parents who withdraw money to pay for the K-12 expense may find themselves face the income tax and 10% penalty. You may also have to repay a state tax deduction or owe taxes on the gain you’ve made in your 529 account. Before withdrawing anything from your plan, check your state tax code to ensure that you won’t face any penalties.
Short Term Risk
529 plans were designed with time in mind. Standard account withdrawals start 10 to 15 years after the account is set up in order to cover the first years of college. If you end up withdrawing from the account a few years after it was set up, you risk exposing yourself to the volatility of the market.
So, you have a child who’s gearing up to attend a prestigious private elementary or secondary school. Great! You want to utilize as much of that $10,000 yearly allowance as possible, but you’re asking yourself – is there a catch? With 529 plans the parent or account custodian controls the money for the beneficiary, in this case the private school attendee. As long as the money is used for the beneficiary’s qualified education expense under the plan, you’ll be fine. If the money isn’t used for a qualified expense, then the IRS comes a knocking. You’ll not only have to pay income taxes on the withdraw but will also face a 10% penalty fee.
Given these limitations, we at U-Nest think that it may be in the best interest of families to grow their 529 account and utilize the money for college and university. However, if you do need to withdraw funds from your plan, it’s good to keep in mind some of the possible repercussions. To learn more about 529 Plans and their amazing benefits, check out our blogs here.