Yes, You Really Can Pay for Private School With 529 Plans Now

By RON LIEBER DEC. 21, 2017

Just last month, it was not certain that the Senate would go along with the House of Representatives’ proposal to let families use 529 college savings plans to pay for private school from elementary school onward. In a bill that offered many perks for the wealthy, the 529 provision was a particularly brazen giveaway.

After all, it’s mostly wealthier people who can save enough to reap large benefits from the provision, which allows $10,000 in annual tax-free 529 account withdrawals for pre-college students starting in 2018.

But it really did happen, and on Friday, President Trump signed the bill that makes it the law of the land.

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With 529 plans, you put money in, let it grow for years in mutual funds and then pull it out to use for higher education expenses. When you do, you don’t pay capital gains taxes on what you’ve earned over time.
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Other 529 tax breaks exist, too. It is states, not the federal government, that actually administer the plans, and 35 of them offer some sort of tax deduction or credit when you deposit money.

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In what we should now refer to as the old days, you might save money for 18 years and then pull the money out over four years while a child completes college. But now, wealthy families can do what’s known as “superfunding” 529 accounts with a pile of money upfront. Then, they can pull out the $10,000 maximum each year to use for elementary and secondary school, until a child starts college.

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Imagine a wealthy family in the highest tax bracket that opens a 529 plan with $200,000 and doesn’t add another cent. The money grows at 6 percent annually, and the family takes out the maximum $10,000 each year, avoiding $2,380 in taxes annually. During the elementary and secondary school years, it saves $30,940 in taxes.

At that point, the account would still have money left over. A lot of money: $370,717. And once the beneficiary of the 529 account enters college, the family can withdraw as much as the entire annual cost of college and related expenses (not just $10,000) each year, avoiding even more capital gains taxes over that period.

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