May I Withdraw Money from a 529 Plan For K-12 Private School Tuition?

Tags: Coverdell ESA, 529 Tampa, 529 Plan Tampa, 529 Tampa Advisor

Parents looking at private schools for their children know that tuition increases aren’t limited to college. We often are asked whether clients can withdraw money from a 529 Plan to pay for pre-college private school tuition. The short answer is: “No.”  Money from 529 Plans can only be withdrawn to pay for higher education expenses. It cannot be spent on kindergarten, grade school, or high school.

However, there is a savings vehicle of the IRA (Independent Retirement Account) sort in the form of a Coverdell IRA account, also known as a Coverdell Education Savings Account (ESA).

A different type of education savings account, it allows for tax-free growth like a 529, but the assets may be used for private school expenses prior to college.

Limited to $2,000 of contributions per year, the IRS summarizes the Coverdell Education Savings Account characteristics:

A Coverdell education savings account (Coverdell ESA) is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account.

 There are certain requirements to set up a Coverdell ESA:

  • When you establish the account, the designated beneficiary must be under the age of 18 or be a special needs beneficiary.
  • You must make the designation of the account as a Coverdell ESA when you create it.
  • The document creating and governing the account must be in writing, and it must meet certain requirements.

You may be able to contribute to a Coverdell ESA to finance the beneficiary's qualified education expenses. Contributions must be made in cash, and they're not deductible. Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. For individuals, your Adjusted Gross Income (AGI) must be below $110,000 in 2017. For couples filing a joint return, your AGI must be below $220,000. Organizations, such as corporations and trusts can also contribute regardless of their adjusted gross income. Contributors must contribute by the due date of their tax return (not including extensions). There's no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.

Additionally, you can open a Coverdell IRA at most discount brokerage firms such as Scottrade, Schwab or Fidelity. Since these accounts are like regular brokerage accounts, they offer more investment options than 529 Plans.

A Coverdell ESA can be used for education expenses either at the K-12 level or higher education. These include: tuition, books, room and board, computers, peripherals, software and even Internet access for kindergarten through high school. Withdrawals are also permissible for costs on the undergraduate and graduate school levels.

Like 529 Plans, earnings in Coverdell IRA accounts grow tax-free. The designated beneficiary can receive tax-free distributions to help offset the rising costs of education on all tiers.

If you would like help choosing and investing in a Coverdell IRA, please contact me at derek.pilecki@gatorcapital.com or (813) 282-7870. While we believe a college education is important, we also understand it is expensive, and the process is daunting.

We do not charge fees for 529 Plans or Coverdell IRAs. We get two benefits from helping you: 1) as parents ourselves, we feel good about setting you and your child on the correct path to pay for college and 2) it enables us the opportunity to begin a discussion about your other investment needs. 

If you have a question beyond the scope of this article, feel free to visit our “Ask Us a Question” page or leave a comment below so we may assist you with your specific situation.

No Comments

Add a Comment