Recently, a client sent us the question “Can I pay for my child’s private school tuition using his 529 plan?”.

Unfortunately, the answer is no. Tax free distributions from a 529 plan can only be used for post-secondary education expenses. However, there is an alternative method to fund both private school and public-school expenses for grades K-12. Tax-free distributions from a Coverdell Education Savings Account (CESA) are allowed to fund eligible K-12 expenses, including tuition to private and religious schools.

CESA’s are similar to 529 plans with some notable differences.

• CESA’s are self-directed – you decide the investment option.
• Each beneficiary (child) can only receive $2,000 as a maximum contribution in total per year from all sources.
• In addition to college costs, CESA distributions can be used for elementary and secondary school costs.
• Funding eligibility to a CESA may be limited based upon the income level of the contributor. There is an income level phase-out. If a taxpayer’s income exceeds $220,000 for joint filers ($110,000 for all other filers), contributions are not allowed to be made by that taxpayer.

Due to the income limitation phaseout, high-income earners are not eligible to fund CESA’s. However, with proper planning there is a “loophole” to work around this limiting factor. First, taxpayers can gift money to a grandparent who may not be subject to the income limitation phase-out and then have the grandparent fund the CESA. Or, the child themselves can make the CESA annual maximum contribution of $2,000 into their own account. The parent can gift the money to their child who then makes the contribution on their own behalf. Contrary to funding various types of IRA’s, the child does not have to have earned income to qualify to make a CESA contribution.

If taxpayers are considering private schooling for their child, start the funding process early as the maximum contribution amount is limited to only $2,000 per year. Plus, if your education expectations change and your child does not attend a private school, the funds can be used at a later date for eligible college expenses. One final item to note – yes, taxpayers can contribute to both a 529 plan and a CESA in the same year. Just be aware of annual gift tax limitations.

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