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529 Plans for Elementary and High School Private Education

There are several financially sound ways to save for your child’s private education. Adviser John Weber explains the 529 plan.

By John Weber

The thought of sending your child to a private school may seem daunting given the sticker price. According to Private School Review, the national average tuition for private schools in the United States for the 2021-2022 school year is $11,844. While many private schools may indeed have some form of financial aid, most of the responsibility falls on parents or other family members to finance their children’s elementary and high school private education.

There are several financially sound ways to save for your child’s private education, and I have chosen to touch only on one of these methods: the 529 savings plan.

Effective on January 1st, 2018, taxpayers are able to use a maximum of $10,000 per year towards private elementary and private high school tuition. When you contribute money into a 529 plan, those assets grow tax free and are distributed tax free if used for education tuition expenses. The purpose of using a 529 plan account is to not only save and invest for your child’s education, but to save for education in a tax-efficient manner.

While each state has their own restrictions, according to Saving for College, 30 states offer a state tax deduction for 529 contributions. For the sake of consistency, I will use Virginia’s state laws. Virginia529 states that Virginia taxpayers may deduct up to $4,000 per account per year on their 529 contributions. Below are examples of how the Virginia state tax deduction works:

  • If you are a Virginia taxpayer and fund your child’s 529 plan with $10,000, you will receive a $4,000 Virginia state tax deduction. 
  • If you are a Virginia taxpayer and fund your child’s 529 plan with $1,000, you will receive a $1,000 Virginia state tax deduction.

Notice that there are no restrictions on how long the money must remain in the 529 to receive the tax deduction. Even if you are currently paying for your child’s tuition through your cash flow, it could make more sense to simply funnel the money through the 529 in cash, receive the tax deduction, and then withdraw the funds tax free.

The IRS does not state any contribution limits for 529s but does mention that your balance cannot exceed the expected cost of the education. While this is vague, many states have limited account balances of 529 plans. For Virginia, if your 529 account balance tops $500,000, you are unable to contribute any additional funds to the account until the balance drops below $500,000. Let’s say that you started saving for your child’s private education late, you can elect to do a strategy called “superfunding.” An individual can contribute $75,000 (or $150,000 if married filing jointly) in a single year towards the 529 account without exceeding the 2021 annual gift tax limit of $15,000. Superfunding essentially allows you to contribute five years’ worth of the current $15,000 annual gift limit in one year. If superfunding the 529 account, you are unable to contribute to the same 529 account for the following five years. This strategy could be beneficial for grandparents who wish to protect assets from estate taxes and contribute to their grandchild’s education.

As far as investment options go for 529 accounts, most 529 providers offer a wide range of funds. Often, target enrollment funds are a popular choice, which are funds that gradually decrease their equity position and increase their fixed income exposure as you get closer to the target date selected. For example: if your child is currently two years old and you want to send them to a private high school, you might consider selecting the 2033 or 2034 target enrollment fund, assuming your child starts the ninth grade at around age 14 or 15.

Typically, target enrollment funds carry a higher expense ratio than a fund that tracks a broad market index like the S&P 500 or Barclays Aggregate Bond Index. If you are a more hands-on investor, you may want to consider creating your own diversified portfolio and rebalancing every couple of years as your child gets closer to the start of school – your portfolio could end up costing less than the target enrollment fund with regard to expense ratios.

If you know you want to send your child to a private elementary and/or private high school, but don’t have a child yet, you can still begin saving today. All you have to do is open a 529 account and list yourself as the beneficiary until your child is born. Since the IRS allows you to transfer ownership of the account to members of your family (as outlined in Internal Revenue Code section 529), changing the beneficiary from a parent to the child will incur no federal gift tax consequences. If the beneficiary is more than one generation apart (such as a grandparent giving their 529 account to a grandchild), there could be gift tax and/or generation skipping tax implications. The good news is that you will only owe gift taxes if you have exceeded the current lifetime giving amount of $11.7 million (if married filing jointly). The bad news is that not enough people know that this strategy is even a possibility.

For those that want to send their child to a private elementary or high school, opening a 529 account early is one of the most financially sound and tax-efficient ways to accomplish this goal. Even if you can already afford to send your child to a private elementary or high school, consider using a 529 account to receive a possible state tax deduction on your contributions. For specific questions about your state’s rules and restrictions, please refer to a tax or financial planning professional.

About the author: John Weber

John Weber is a financial planning associate at Omega Wealth Management, a fee-only financial life planning firm based in Arlington, Virginia. Omega Wealth Management’s goal is to know clients on a personal level, integrating their values, vision, and wealth to provide holistic and comprehensive financial planning. John can be reached at john@omegawealthmanagement.com