07 Jul Can I use a 529 plan to pay for K-12 tuition?

Q. Can a New Jersey resident use a 529 plan to pay for K-12 tuition at a school in New York State?
— Grandpa

A. 529 plans are a great way to save for college. But now, you can also use the funds for K-12 educations, too.

529 plans are state-run plans that allow you to contribute tax-deferred dollars for college and university expenses, said Dawn Brown, a certified financial planner with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

She said the plans were created to be used to pay for tuition and other qualified expenses.

“The Tax Cuts and Jobs Act in 2017 expanded the use of 529 plans to include paying for tuition at an elementary or secondary school,” Brown said. “It includes public, private and religious schools for K-12 students. A maximum of $10,000 can be withdrawn annually to pay for tuition.”

Though the federal law expanded the use of 529 plans, not all states conform with federal law, she said.

Brown said New Jersey conforms with the law, so if a New Jersey resident owns a New Jersey plan, they can use up to $10,000 to pay for tuition in a New York school.

But New York does not conform with federal law.

“If a withdrawal is made from a New York 529 plan to pay tuition at an elementary or secondary school (K-12) the New York 529 plan classes it as a non-qualified distribution,” Brown said. “Therefore New York will recapture any tax benefit that was received for the contribution.”

Also, she said, New York will tax any earnings on the withdrawal on a New York tax return.

“A New Jersey resident needs to be aware of the rules in the state where the plan is opened,” Brown said.

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This story was originally published on July 7, 2020.

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