529 Savings Plans Have More Uses -- But States Need to Catch Up
The new federal tax law allows families to use 529 college plans to pay tuition for kindergarten through high school. But doing so before state laws are revised to reflect the new rules could trigger a tax and a penalty.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter
Question: What are the new rules for using money in a 529 college-savings plan for kindergarten through 12th-grade expenses, rather than just college?
Answer: The new tax law expanded the definition of eligible expenses for 529s. You can now withdraw up to $10,000 from a 529 each year tax-free to pay tuition for kindergarten through 12th grade. You can still use 529 money tax-free for college expenses, too, with no annual limit. Eligible college expenses include tuition and fees, room and board (even an off-campus apartment for a student who goes to school at least half-time), books and a computer. For more information about eligible expenses, see the “Qualified Tuition Program” section of IRS Publication 970, Tax Benefits for Education (opens in new tab).
The new tax law left some unknowns. Some states need to change their laws to coordinate with the new federal law. Otherwise, they could end up charging state income taxes and a 10% penalty for withdrawals that aren’t used for college, says Susie Bauer, senior vice president and 529 manager at Baird Private Wealth Management. Also, if you received a tax deduction for your contribution, you may have to repay it if you use the money for non-qualified expenses and your state doesn't change its rules. Contact your plan before taking money out of the 529 for K-12 tuition to make sure the withdrawal is a qualified expense in your state. If your state’s rules aren’t clear yet, you may want to wait a few months before taking a precollege withdrawal. More states should be clarifying their laws in the next few months.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
You may also want to adjust your investments. “If you’re going to take advantage of the K-12 tuition change, you need to take into account your time horizon,” says Roger Young, a senior financial planner at T. Rowe Price. Depending on your child’s age, you may be taking those withdrawals much earlier than you had originally intended, particularly if you invested in an age-based fund whose mix of stocks and bonds are tied to the year your child will start college. In that case, you may want to shift some money you plan to withdraw for K-12 expenses in the next few years to more conservative investments, so you won’t have to worry about market volatility when the tuition bill is due. And because you can change your 529 investments only twice per year, consider keeping the current money invested where it is but adding new contributions to conservative investments for short-term expenses, says Young.
Even though you can now use some money from your 529 for K-12 tuition, think carefully before taking that withdrawal. “With the shorter time horizon, you’re probably going to be more conservative and will probably have less gain potential,” says Young. “For people who aren’t in a high tax bracket, you have to ask: ‘Does this really make sense to me?’ ” The longer you keep the money growing in the account, the more time you’ll have to benefit from the tax-free gains for eligible expenses.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
-
The Many Definitions of Modified Adjusted Gross Income (MAGI)
The definition of modified adjusted gross income differs depending on what the calculation is used for.
By Joy Taylor • Published
-
Are You a Money Moron? Where’s Our Financial Common Sense?
Not to be harsh, but shouldn’t we all have seen this economic angst coming? Let’s get frank about Money Moron Syndrome and how to avoid falling victim to it.
By Neale Godfrey, Financial Literacy Expert • Published
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
By Kimberly Lankford • Published
-
How to Correct a Mistake on Your RMDs from IRAs
retirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
By Kimberly Lankford • Published
-
Ways to Spend Your Flexible Spending Account Money by March 15 Deadline
spending Many workers will be hitting the drugstore in the next few days to use up leftover flexible spending account money from 2018 so they don’t lose it.
By Kimberly Lankford • Published
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
By Kimberly Lankford • Published
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
By Kimberly Lankford • Published
-
When You Can Expect to Receive Your Tax Refund
taxes The quickest way to receive your tax refund is to file electronically and have the money directly deposited into your bank account.
By Kimberly Lankford • Published
-
How a Move Can Change Your 529 Plan Tax Deduction
529 Plans The tax deduction you get for contributing to your state’s 529 plan can disappear if you move to another state.
By Kimberly Lankford • Published
-
Tap an IRA Tax-Free With an HSA Rollover
IRAs You can convert tax-deferred money in a traditional IRA into tax-free cash by rolling it over to a health savings account and using it to pay for medical bills.
By Kimberly Lankford • Published