Since they were first established in 1996, Section 529 college savings plans have become a popular tool used by parents to save for future college expenses. Families have established nearly 13 million such plans over the past two decades, and assets in these plans rose to $282 billion in Q3 last year.

One reason 529 plans are so popular is the tax breaks they allow. As long as funds are used to pay for qualified education expenses, earnings within the account grow tax-free. Also, many states allow full or partial deductions for 529 plan contributions.

Good Gets Even Better

Believe it or not, 529 plans just got another boost that makes them potentially even more attractive than they were before. This new benefit comes courtesy of the tax reform that was signed into law in December.

The tax reform act includes a provision that allows 529 plan funds to be used to pay for qualifying elementary and secondary school expenses, as well as college expenses. So if you want to withdraw some money from your 529 plan to help pay for private elementary or high school expenses, you can now do so without paying a penalty or taxes.

Before the tax reform legislation, any 529 plan withdrawals that were not used to pay for qualified college education expenses were subject to ordinary income tax and a 10% tax penalty on the earnings portion of the distribution. Now, up to $10,000 of 529 funds can be withdrawn each year to help cover primary and secondary private school tuition.

If you believe you might want to withdraw some 529 funds to help pay for K-12 expenses, you may want to consider opening an additional account within your 529 plan. This will make it easier to keep track of your separate K-12 and college education savings goals and choose the most appropriate investments based on your investment horizon, risk tolerance, and withdrawal schedule.

However, keep in mind that if you withdraw 529 plan funds to pay for K-12 expenses, this could impact your carefully laid college savings plans. Every dollar withdrawn from a 529 plan early is a dollar that won’t be there when your child is ready to start college. So think carefully before withdrawing 529 funds early, even if the money won’t be subject to a taxes and penalties.