Several years ago, with the 2017 Tax Cuts and Jobs Act (TCJA), the federal government changed the rules regarding 529 accounts, by adding additional approved use of 529 funds. The TCJA allows families to use up to $10,000 of 529 funds for private K-12 tuition. However, not every state has adopted the federal government’s expanded use. Let’s take a look and see what this means for you and the beneficiaries of your 529 account.

Qualified Expenses

A 529 savings account covers “qualified future and higher education expenses” for private and public colleges and universities, as well as vocational schools and community colleges. These qualified expenses include tuition and fees, room and board, textbooks and lab fees, special needs equipment, and some study abroad programs. Computers, internet, and related “peripheral equipment,” including mouses, speakers, and software, are considered qualified future and higher education expenses as well, but they must be used by the beneficiary primarily during their enrollment years.

Expanded Federal Tax Benefits

The TCJA federal tax reform package became operable in January 2018 and addresses 529 plans directly. With the reform package, the federal government expanded its definition of qualified future and higher education expenses. It now allows tax-free withdrawals of up to $10,000 each year for K-12 private and parochial school tuition. Unlike withdrawals for traditional qualified future higher education expenses, such withdrawals must be used for tuition only; otherwise, they could be subject to a penalty and federal and state tax.

In addition, under the reform package, account holders may transfer up to $18,000 annually, as of January 2024, to an ABLE (Achieving a Better Life Experience) account without incurring federal taxes. ABLE accounts are savings plans for individuals with special needs.

Another change under the Secure Act of 2019 is that the savings in a 529 plan may be used tax-free for apprenticeship expenses and for student loan debt repayment of up to $10,000 each for the beneficiary and any siblings.

And, starting in 2024 with the Secure 2.0 Act, account holders can rollover up to $35,000 in unused funds from their 529 account into a Roth IRA for the beneficiary.

Private School Tuition and State Tax Benefits

Not all states have adopted the federal government’s expanded definition of qualified expenses. If your state offers tax benefits for 529s, you should understand what your state considers “qualified education expenses” before withdrawing money. Some states do not consider K-12 tuition to be a qualified education expense. If this is the case with your state and you take out funds to pay for K-12 education, a withdrawal made for these expenses may be subject to state tax consequence if it is attributable to contributions that were deducted for state income tax purposes. Be sure to do your research, which may include consultation with your plan administrator, state tax department or financial advisor.

Some states do not currently allow the use of 529 funds for K-12 tuition at the state level. Keep in mind that state law is subject to change, so it’s important to check the details in your state for the most up to date information.

New Mexico Taxes and Private School Tuition

New Mexico currently has a generous tax incentive for contributions to the state’s 529 plan. The full amount of contributions to a New Mexico 529 plan can be claimed as a deduction for New Mexico individual income tax purposes when funds are used to pay for qualified education expenses. Keep in mind, you can contribute up to a maximum account balance of $500,000 for each beneficiary.

In 2023, the New Mexico Legislature passed House Bill 342 — Education Savings Plan Uses. The legislation allows New Mexico residents to claim a tax deduction for contributions used to pay for additional federal qualified educational expenses, including up to $10,000 per year to cover expenses for tuition in K-12 schools. The legislation goes into effect June 16, 2023. You can read more about the legislation and the expanded qualified expenses in New Mexico here.