How To Use Your 529 Before College

By: Josh Hartman, CWS®, Vice President, Wealth Management Consultant
June 21, 2021

From the time a child is born, it’s only natural for parents to start planning and saving for his or her future. Many parents open 529 accounts when a child is born to save for their college education.

529 Private School
529 plans are popular savings vehicles because they offer tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified expenses.1 Other benefits include significant flexibility in the amount you can contribute and the potential for state income tax breaks dependent on the rules for your state of residency.

American Families turn to 529 plans to save for education

As a 529 account grows, it may be tempting to tap into the earnings before college. Be careful. If the money is used for anything outside of the qualified education expenses, the family must pay a tax penalty of 10% on the plan’s earnings.3

Fortunately the definition of qualified expenses was expanded under the 2017 Tax Cuts and Jobs Act to include up to $10,000 per year in tuition expenses at primary or secondary public, private or parochial schools.4  This may be helpful for parents interested in using the funds to pay private K-12 tuition. The downside is you will miss the biggest benefit of starting to save in a 529 plan early – compounding growth. You should carefully weigh the benefits and risks of using funds in a 529 for K-12 education versus college expenses.


You’ve Overfunded the Account
You may have established a 529 when your child was born with the intention of paying for college but as they matriculate you find they are in line for merit-based or athletic scholarships, or they decide college is not for them. Maybe their school choice is less expensive, and you anticipate an overage in your 529. You can use the estimated excess funds to pay for private secondary education or transfer the funds to another beneficiary (such as a sibling) without incurring a penalty.

You Are Eligible for Tax Credits or Deductions
If you are already paying for K-12 education, you can fund the 529, withdraw tuition payments up to $10,000 per year, and may receive the tax benefit of utilizing the account. This practice must be in accordance with state tax rules. Consult your tax advisor.

Your 529 Has Grown Considerably
If your 529 has earned significant gains, you may want to save your cash and use the gains to pay K-12 tuition since distributions from the plan are tax-free when used for qualified expenses.

529 plans are not the only education savings vehicles. The Coverdell Education Savings Account (ESA) allows parents to save for higher education in a tax-advantaged way, but they can also be used to pay for K-12 expenses.

It’s important to note that you can only contribute to one of these accounts for your child until they reach age 18 whereas there are no age restrictions with a 529 plan. Next, the annual contribution limit to a Coverdell ESA is capped at $2,000 for 2021 and the maximum lifetime contribution to one of these plans is $36,000 per child.

It’s important to note that there are household income limits for contributors to these plans. Taxpayers claiming single, head-of-household, or married-filing-separately cannot make contributions is their Modified Adjusted Gross Income (MAGI) is more than $110,000. The same is true for contributors who are married-filing-jointly if their MAGI is more than $220,000.7

Finally, you can’t leave money in a Coverdell account indefinitely. If your child doesn’t use all the money for education expenses by age 30, any remaining balance must be distributed. Further the IRS levies a 10% tax penalty and assesses ordinary income tax on the distribution.

Family members and friends can help support a child’s education in a variety of ways. Instead of toys for birthdays and holidays, family and friends can make donations to the child’s education fund to be used at the parent’s discretion, in accordance with rules for the account.

For larger gifts, donors can make tuition payments of unlimited amounts directly to a school without triggering any gift taxes under federal guidelines. You don’t have to be concerned about the $15,000 annual federal gift tax exclusion. This means you could pay $50,000 in tuition directly to the school and give a child $15,000 ($30,000 for a joint gift) each year under the exclusion limit. There are no benefits in the year the donation takes place, but it will lower the amount of your taxable estate.

Keep in mind, however, that direct payments can be applied only to tuition costs for college — other expenses such as room and board, fees, equipment, books, and other miscellaneous charges do not qualify.

If you are thinking about assisting a child or grandchild with their education expenses at any time during their academic journey, talk to a Commerce Trust advisor who can help you review your cashflow and savings options.

The ideal approach to paying for education is dependent upon your unique situation and priorities. A Commerce Trust advisor can help with financial planning, education savings and determining how much you can afford to pay now and in the future for education expenses.

* Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and
specific financial situations.
1 “Maximum 529 Plan Contribution Limits by State,” by Kathryn Flynn, Accessed April 29, 2021
2 Total Assets in 529 Plans Nationally by College Savings Plan Network x4.pdf, Accessed May 11, 2021
3 “529 Plan Rules for When a Child Skips College,” by Emma Kerr, Accessed April 29, 2021
4 “529 savings plans and private school tuition,” by Kathryn Flynn become available.-,529 plans can be used for private elementary and high,public,
private or parochial schools. Accessed April 29, 2021
5 “How To Use A 529 Plan For Private Elementary And High School,” by Robert Farrington Accessed April 29, 2021
6 “529 Plan Withdrawals for Private School” by Rebecca Lake accessed April 29, 2021
7 ”A Beginners guide to the Coverdell ESA,” by Ken Clark accessed May 13, 2021

The opinions and other information in the commentary are provided as of June 22, 2021. This summary is intended to provide general information only, and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commerce Trust is a division of Commerce Bank.



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josh hartman commerce trust
Josh Hartman, CWS® Vice President, Wealth Management Consultant Commerce Trust
Josh is a wealth management consultant for Commerce Trust. He facilitates the introduction of our prospective clients to a comprehensive service team which includes private banking, investment management, trust administration, and financial planning.

Josh provides an integrated and seamless client experience as we partner with clients to meet their long-term goals and objectives. Prior to joining Commerce in 2015, Josh worked for an international financial services organization and a large regional bank. He received his Bachelor of Arts from the University of Notre Dame, his Master in Business Administration degree from Webster University and the Certified Wealth Strategist® designation from the Cannon Financial Institute.

He is active in the community having served as a board member for Big Brothers Big Sisters, President of the Springfield Police & Fire Pension Fund, President of the Notre Dame Club of the Ozarks and member of the Professional Advisors Council for the Community Foundation of the Ozarks.