Investing advice for K-12 private school education

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
4091bear
Posts: 5
Joined: Wed Jul 10, 2024 2:07 am

Investing advice for K-12 private school education

Post by 4091bear »

Hello Everyone,

This is my first ever post here so I’d like to apologize in advance if I’m posting on the wrong forum. I’m an absolute newbie in investing and only started my personal finance journey a couple of months ago. For context, I live in Washington state with my wife & daughter. My daughter just completed 1st Grade and will be attending 2nd Grade in fall. We have been enrolling her in a private school and planning to do so through High school. Washington State allows $10K/year withdrawal on 529 plan for K-12 private school education which I also only learned about recently. Her annual tuition fee is just over $10K and so far we have been paying it through our cash flow. We plan to fully cover her education costs at least through high school and partially/fully for her college tuition.

As for our financial position & plan, there is $17K on her 529 plan (2036 target enrollment) which we had thought could only be used for college. Outside of our 401K and taxable brokerage accounts, my wife and I are conservatively holding $120K liquid cash in a mix of checking, HYSA and CD for emergency fund & flexibility purposes. We maxed out our 401K through our employers and are investing $1K/week into our taxable brokerage account. We also contribute $500/month for our daughter, split between the 529 plan and a brokerage account we intended for her future. Between our conservative liquid savings and investments, as well as our income, we hope we have sufficient flexibility to make adjustments in our investment choices to get us to the ideal path.

Should we continue on our plan of covering 2nd grade-high school through our cashflow and only use 529 for her college? I feel like there must be a more optimal way of doing it, but also realize college is just over a decade away so I don’t know what would be our options given the time horizon. Should we open another 529 or brokerage account investing in a 2031/2032 targeted date fund to cover her high school tuition perhaps?

Thank you in advance for reading this post. Any feedback would be sincerely appreciated!
meadowrue
Posts: 838
Joined: Wed May 04, 2022 3:55 pm

Re: Investing advice for K-12 private school education

Post by meadowrue »

What we have done is to open a second 529 specifically for private K-12 expenses so as not to co-mingle college funds. To capture the state tax deduction, we deposit each month’s tuition payment in the separate 529 account, then withdraw it after 7 days to pay tuition. It’s just one additional step to capture the deduction, but well worth it. Then you can continue to save for college in your original 529. IMO, the college fund should be invested more aggressively for a 1st grader but the K-12 fund should factor in the much shorter investment time frame (assuming you’re just “running tuition through” the 529). You could also have two funds in the K-12 account, one more aggressive designated for HS, and, say, a MM fund for tuition due this year. This has worked well for us.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
worthit
Posts: 1070
Joined: Tue Jun 19, 2018 2:10 pm

Re: Investing advice for K-12 private school education

Post by worthit »

meadowrue wrote: Wed Jul 10, 2024 6:18 am What we have done is to open a second 529 specifically for private K-12 expenses so as not to co-mingle college funds. To capture the state tax deduction, we deposit each month’s tuition payment in the separate 529 account, then withdraw it after 7 days to pay tuition. It’s just one additional step to capture the deduction, but well worth it. Then you can continue to save for college in your original 529. IMO, the college fund should be invested more aggressively for a 1st grader but the K-12 fund should factor in the much shorter investment time frame (assuming you’re just “running tuition through” the 529). You could also have two funds in the K-12 account, one more aggressive designated for HS, and, say, a MM fund for tuition due this year. This has worked well for us.
Very interesting idea. I am assuming you don't get the tax deduction on the college 529?
mw1739
Posts: 1178
Joined: Mon Mar 21, 2011 5:44 pm

Re: Investing advice for K-12 private school education

Post by mw1739 »

Since Washington doesn't have any tax benefits for 529 contributions, I don't see the benefit of bothering, at least for elementary school. If you have a lump sum you could designate for high school, I suppose you could put it in the account to see if it grows over the next 7-10 years to cover high school tuition.

Personally I pay our private school tuition out of cashflow and reserve the 529 for college. The biggest benefit of the 529 is long-term tax-sheltered growth, which is a moot point if you're withdrawing from it each year to pay elementary school tuition.
meadowrue
Posts: 838
Joined: Wed May 04, 2022 3:55 pm

Re: Investing advice for K-12 private school education

Post by meadowrue »

worthit wrote: Wed Jul 10, 2024 6:49 am
meadowrue wrote: Wed Jul 10, 2024 6:18 am What we have done is to open a second 529 specifically for private K-12 expenses so as not to co-mingle college funds. To capture the state tax deduction, we deposit each month’s tuition payment in the separate 529 account, then withdraw it after 7 days to pay tuition. It’s just one additional step to capture the deduction, but well worth it. Then you can continue to save for college in your original 529. IMO, the college fund should be invested more aggressively for a 1st grader but the K-12 fund should factor in the much shorter investment time frame (assuming you’re just “running tuition through” the 529). You could also have two funds in the K-12 account, one more aggressive designated for HS, and, say, a MM fund for tuition due this year. This has worked well for us.
Very interesting idea. I am assuming you don't get the tax deduction on the college 529?
Great question! We currently only fund the K-12 account because it’s all we can afford! And we somewhat frontloaded the college 529 years ago. Get the tax deduction however you can (through a “college” or “K-12” account) - outside of that, the benefit I see if that you can allow more education funds to grow tax-free. I don’t love the investment options in my 529 but I do love the tax free growth.
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Admiral
Posts: 5109
Joined: Mon Oct 27, 2014 12:35 pm

Re: Investing advice for K-12 private school education

Post by Admiral »

mw1739 wrote: Wed Jul 10, 2024 6:51 am Since Washington doesn't have any tax benefits for 529 contributions, I don't see the benefit of bothering, at least for elementary school. If you have a lump sum you could designate for high school, I suppose you could put it in the account to see if it grows over the next 7-10 years to cover high school tuition.

Personally I pay our private school tuition out of cashflow and reserve the 529 for college. The biggest benefit of the 529 is long-term tax-sheltered growth, which is a moot point if you're withdrawing from it each year to pay elementary school tuition.
+1. If you don't leave the money in there to grow, there's no point. (I'd also add there are no guarantees on growth: the bond market cratered just as our first kid was about to withdraw money, which was when the plan had automatically gone to mostly bonds. We didn't lose money, but we made less.)

We put two kids through private school. For most of that time, there was no ability to use 529 funds to pay for it. Once they allowed it, we didn't bother. We use it for college. We, however, get a tax deduction.
Mattman25
Posts: 103
Joined: Wed Nov 01, 2023 1:38 pm

Re: Investing advice for K-12 private school education

Post by Mattman25 »

meadowrue wrote: Wed Jul 10, 2024 7:58 am I don’t love the investment options in my 529 but I do love the tax free growth.
Let me get this straight: the state of Washington does not give any tax deductions for your 529 contributions. So, you are free to pick any 529 plan offering from any state you want. And you can rollover from one provider to another (I think up to once a year?). Pick a plan that you do like. What's the problem? I use Utah's my529 but I think California's plan has cheaper options in recent years.
meadowrue
Posts: 838
Joined: Wed May 04, 2022 3:55 pm

Re: Investing advice for K-12 private school education

Post by meadowrue »

Mattman25 wrote: Wed Jul 10, 2024 9:40 am
meadowrue wrote: Wed Jul 10, 2024 7:58 am I don’t love the investment options in my 529 but I do love the tax free growth.
Let me get this straight: the state of Washington does not give any tax deductions for your 529 contributions. So, you are free to pick any 529 plan offering from any state you want. And you can rollover from one provider to another (I think up to once a year?). Pick a plan that you do like. What's the problem? I use Utah's my529 but I think California's plan has cheaper options in recent years.
I don’t live in Washington like the OP. I get a state tax deduction and never bothered shopping around for alternate 529 plans for that reason. Maybe I could have/should have? But with DC almost at college age, it’s too late to second-guess!
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
FinFin
Posts: 13
Joined: Tue May 28, 2024 8:27 am

Re: Investing advice for K-12 private school education

Post by FinFin »

I'd invest all $3000 a year in the 529 and the $10,000 you pay for K-12 tuition into the 529. I'd withdraw the $10,000 a year from the 529.

This will effectively increase your "basis" in the 529 so that any unqualified withdrawals (in the unlikely event) will have less penalties. All 529 withdrawals are prorata contributions and earnings.

This will be most tax efficient for the child's "brokerage" as the money can be used for a Roth if the 529 has been opened 15 years or more. So when the student gets a summer job you can "match" the earnings and start a Roth
The Roth can be used by the child for first house and is a strong foothold for generational wealth..
Topic Author
4091bear
Posts: 5
Joined: Wed Jul 10, 2024 2:07 am

Re: Investing advice for K-12 private school education

Post by 4091bear »

meadowrue wrote: Wed Jul 10, 2024 6:18 am What we have done is to open a second 529 specifically for private K-12 expenses so as not to co-mingle college funds. To capture the state tax deduction, we deposit each month’s tuition payment in the separate 529 account, then withdraw it after 7 days to pay tuition. It’s just one additional step to capture the deduction, but well worth it. Then you can continue to save for college in your original 529. IMO, the college fund should be invested more aggressively for a 1st grader but the K-12 fund should factor in the much shorter investment time frame (assuming you’re just “running tuition through” the 529). You could also have two funds in the K-12 account, one more aggressive designated for HS, and, say, a MM fund for tuition due this year. This has worked well for us.
Thank you for your response! I did consider opening a second 529 specifically for the K-12 expenses like you mentioned, although not for capturing state tax deduction for the said reason of mw1739 that our state does not have any tax benefits for 529 contributions. So if I do open a second brokerage, mostly it would be just avoid co-mingling with the college funds. I still plan to contribute $3K annually for the college funds so technically there is room for another $15K before I hit the annual gift tax contribution limit. If my logic is right, I can invest $10-15K into a 529 account at the beginning of each K-12 school year similar to prepay for 1-1.5 year's worth of the $10K permitted K-12 private school 529 withdrawal. With this plan, I can then withdraw $10K each calendar year to pay for her K-12 private tuition. That way I can benefit a little bit from the compounded interest without touching on the $3K annual contribution towards college. Does this plan sound sensible?
Topic Author
4091bear
Posts: 5
Joined: Wed Jul 10, 2024 2:07 am

Re: Investing advice for K-12 private school education

Post by 4091bear »

FinFin wrote: Wed Jul 10, 2024 6:34 pm I'd invest all $3000 a year in the 529 and the $10,000 you pay for K-12 tuition into the 529. I'd withdraw the $10,000 a year from the 529.

This will effectively increase your "basis" in the 529 so that any unqualified withdrawals (in the unlikely event) will have less penalties. All 529 withdrawals are prorata contributions and earnings.

This will be most tax efficient for the child's "brokerage" as the money can be used for a Roth if the 529 has been opened 15 years or more. So when the student gets a summer job you can "match" the earnings and start a Roth
The Roth can be used by the child for first house and is a strong foothold for generational wealth..
Thank you for your response FinFin! This advice is probably the closest to what I have been thinking. As I just responded to meadowrue, I still plan to contribute $3K annually for the college funds so technically there is $15K before I hit the annual gift tax contribution limit. If my logic is right, I can invest $10-15K into the 529 account at the beginning of each K-12 school year before I hit the $18K annual gift tax contribution limit. With this logic, I can invest $10-15K into a 529 account at the beginning of each K-12 school year similar to prepay for 1-1.5 year's worth of the $10K permitted K-12 private school 529 withdrawal. Every calendar year I can then withdraw $10K to pay for her K-12 private tuition. That way I should benefit from the compounded interest (assuming it's growing) without touching the $3K annual contribution towards the college saving. The only difference is I have not thought about using the account as a future Roth and am planning to use up all of the 529 to cover 50-70% of her college fund. I still don't fully understand the rollover mechanism from the 529 into a 401K. I am also wary of uncertainties and different possibilities at the end of the long time horizon, especially with a $35K rollover limit. For example, I am investing for an in-state community college+public university in mind but at the same time not ruling out the possibility of private college or overseas. Or who knows if we are lucky enough that she ends up with some scholarship. I found the cost gap between an in-state college education and private one to be so wide that I'm wary we may end up exceeding the $35K balance for the rollover limit. Mainly for this reason I ended up deciding to split 50-50 between her 529 account ($250/month) and a VFIAX ($250/month) with her as the beneficiary.
Topic Author
4091bear
Posts: 5
Joined: Wed Jul 10, 2024 2:07 am

Re: Investing advice for K-12 private school education

Post by 4091bear »

mw1739 wrote: Wed Jul 10, 2024 6:51 am Since Washington doesn't have any tax benefits for 529 contributions, I don't see the benefit of bothering, at least for elementary school. If you have a lump sum you could designate for high school, I suppose you could put it in the account to see if it grows over the next 7-10 years to cover high school tuition.

Personally I pay our private school tuition out of cashflow and reserve the 529 for college. The biggest benefit of the 529 is long-term tax-sheltered growth, which is a moot point if you're withdrawing from it each year to pay elementary school tuition.
yeah no tax benefit for 529 contributions in Washington state unfortunately! :(
meadowrue
Posts: 838
Joined: Wed May 04, 2022 3:55 pm

Re: Investing advice for K-12 private school education

Post by meadowrue »

4091bear wrote: Thu Jul 11, 2024 12:44 pm
meadowrue wrote: Wed Jul 10, 2024 6:18 am What we have done is to open a second 529 specifically for private K-12 expenses so as not to co-mingle college funds. To capture the state tax deduction, we deposit each month’s tuition payment in the separate 529 account, then withdraw it after 7 days to pay tuition. It’s just one additional step to capture the deduction, but well worth it. Then you can continue to save for college in your original 529. IMO, the college fund should be invested more aggressively for a 1st grader but the K-12 fund should factor in the much shorter investment time frame (assuming you’re just “running tuition through” the 529). You could also have two funds in the K-12 account, one more aggressive designated for HS, and, say, a MM fund for tuition due this year. This has worked well for us.
Thank you for your response! I did consider opening a second 529 specifically for the K-12 expenses like you mentioned, although not for capturing state tax deduction for the said reason of mw1739 that our state does not have any tax benefits for 529 contributions. So if I do open a second brokerage, mostly it would be just avoid co-mingling with the college funds. I still plan to contribute $3K annually for the college funds so technically there is room for another $15K before I hit the annual gift tax contribution limit. If my logic is right, I can invest $10-15K into a 529 account at the beginning of each K-12 school year similar to prepay for 1-1.5 year's worth of the $10K permitted K-12 private school 529 withdrawal. With this plan, I can then withdraw $10K each calendar year to pay for her K-12 private tuition. That way I can benefit a little bit from the compounded interest without touching on the $3K annual contribution towards college. Does this plan sound sensible?
Sounds very sensible to me!
“We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds.”—Aristotle Onassis
Topic Author
4091bear
Posts: 5
Joined: Wed Jul 10, 2024 2:07 am

Re: Investing advice for K-12 private school education

Post by 4091bear »

meadowrue wrote: Thu Jul 11, 2024 1:18 pm
4091bear wrote: Thu Jul 11, 2024 12:44 pm
meadowrue wrote: Wed Jul 10, 2024 6:18 am What we have done is to open a second 529 specifically for private K-12 expenses so as not to co-mingle college funds. To capture the state tax deduction, we deposit each month’s tuition payment in the separate 529 account, then withdraw it after 7 days to pay tuition. It’s just one additional step to capture the deduction, but well worth it. Then you can continue to save for college in your original 529. IMO, the college fund should be invested more aggressively for a 1st grader but the K-12 fund should factor in the much shorter investment time frame (assuming you’re just “running tuition through” the 529). You could also have two funds in the K-12 account, one more aggressive designated for HS, and, say, a MM fund for tuition due this year. This has worked well for us.
Thank you for your response! I did consider opening a second 529 specifically for the K-12 expenses like you mentioned, although not for capturing state tax deduction for the said reason of mw1739 that our state does not have any tax benefits for 529 contributions. So if I do open a second brokerage, mostly it would be just avoid co-mingling with the college funds. I still plan to contribute $3K annually for the college funds so technically there is room for another $15K before I hit the annual gift tax contribution limit. If my logic is right, I can invest $10-15K into a 529 account at the beginning of each K-12 school year similar to prepay for 1-1.5 year's worth of the $10K permitted K-12 private school 529 withdrawal. With this plan, I can then withdraw $10K each calendar year to pay for her K-12 private tuition. That way I can benefit a little bit from the compounded interest without touching on the $3K annual contribution towards college. Does this plan sound sensible?
Sounds very sensible to me!
Thank you. Really appreciate your input! :D :D
Post Reply