03 Jun Can we use our 529 plan to pay for past K-12 tuition?

Q. Our last child graduates college this year and we still have a significant amount of balance remaining in our 529 plan. I understand this can be used to cover K-12 tuition costs. We did not use any money for her elementary or secondary private school tuition. Can we do this retroactively?
— Parent

A. Congratulations on seeing your last child complete an undergraduate degree.

It sounds as if you were able to get there without much, if any, student debt.

With respect to unused 529 funds, unfortunately, you may not use them retroactively to pay for previous elementary or secondary private school tuition expenses, said David Principe, a certified financial planner with SAGEbroadview Wealth Management in Morristown.

To qualify for beneficial tax treatment, a distribution must occur in the same year as the qualifying educational expense, he said.

There are some other options for the funds, he said.

“Common uses for 529 funds after undergrad can include paying for graduate school, repaying student loans — $10,000 lifetime limit per beneficiary— and transferring for use by other beneficiaries, who must be family member of current beneficiary,” he said.

You can also save it for future educational expenses for a future grandchild, for example.

Finally, you can also take a non-qualified distribution.

“Remember that non-qualified distributions are subject to ordinary income tax plus a 10% federal penalty – so if that winds up being the only path, take into consideration current and possible future tax brackets to decide when best to take them,” Principe said.

Note that there is no age limit for the beneficiary of a 529 account as there is for Coverdell accounts, so if your daughter decides to go back to school in the future you could keep the funds set aside for her, he said.

“If you transfer the beneficiaries to someone either in the same generation as the original beneficiary or in an older generation then there are no tax consequences, however, if you move down the family tree into a younger generation, you may be subject to the Generation Skipping Tax,” he said. “The list of potential donees is long, and most people aren’t likely to be subject to the GST, so do consider that option for other family members.”

IRS Publication 970 will give you more details.

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This story was originally published on June 3, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.