Can a person use a 529 plan to pay for nursery and pre-K private schools?

Feb 13, 2018
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Prior to December 2017, 529 plans could not be used for private schools. In December 2017, the rules were changed and signed into law. Money placed in a 529 account can be used for private schools. Unfortunately, there is no updated information on the IRS site about the rules for 2018. This relatively recent New York Times article only speaks to private elementary and secondary schools, which leaves out nursery and pre-K.

A couple things I would say about using 529 plans:

  • The benefit of using the 529 plan is the ability to avoid taxes on the income growth. If you put money in a 529 account and pull it just a few years later for nursery school, it may not have accumulated enough in tax-free income to save significantly on taxes.
  • As the New York Times article indicates, it becomes worthwhile when you put a large initial contribution into a 529 account, and only pulling out $10,000 annually for school tuition. Then the remaining contribution has an opportunity to grow and accumulate tax-free income.
  • Because 529 plans are allowed to be rolled over to siblings, nieces, and nephews, contributions can have significant time to increase their tax-free income if the roll-over option is used for younger siblings, nieces, and nephews.

My understanding is the IRS will be interpreting the new tax law in the coming year. There will be more specific guidance in coming months.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Lesley F. Katz, CPA, is the founder of Leveraging Financial Knowledge LLC in Lower Gwynedd, Pa.

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