"Laddering" a 529 for K-12 private school?

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bombcar
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Joined: Sun Aug 12, 2007 6:41 pm

"Laddering" a 529 for K-12 private school?

Post by bombcar »

I may be wrong (taking Wisconsin as an example) - but if I read this correctly, you can deduct contributions to a 529 up to a certain amount (
$3,860 per Beneficiary for a single filer or married couple filing a joint return) and "Up to $10,000 annually can be used toward K-12 tuition (per student)."

Now according to https://dfi.wi.gov/Pages/EducationalSer ... ogram.aspx :
The 365-Day Rule effects the tax treatment on contributions when a withdrawal is made within a 365-day period. Two examples: (1), Pat opens an account with $2,000 in December 2022 and subtracts on their 2022 tax return. In August 2023, $1,000 is withdrawn for qualified college expenses. Since the $1,000 had not been in the account for 365 days, $1,000 is then added back as taxable income on their 2022 tax return. (2) Same situations as above, but the account was open with a $1,000 balance in 2021, before the 2022 addition of $2,000. In this case, the withdrawal would be considered as taken from the older money outside of the 365-day window and is not reported as income on 2022 taxes. This method often follows "first-in, first-out accounting principles.
So it sounds like you can receive a tax break for K-12 private school by contributing the tuition at least 366 days in advance of disbursing it, and you can continue this for the entire education. This of course reduces the amount of the tax break you could save for college, but if you weren't going to use that anyway for whatever reason, it would work.

Am I missing something major?
toddthebod
Posts: 5741
Joined: Wed May 18, 2022 12:42 pm

Re: "Laddering" a 529 for K-12 private school?

Post by toddthebod »

bombcar wrote: Sat May 27, 2023 11:24 pm I may be wrong (taking Wisconsin as an example) - but if I read this correctly, you can deduct contributions to a 529 up to a certain amount (
$3,860 per Beneficiary for a single filer or married couple filing a joint return) and "Up to $10,000 annually can be used toward K-12 tuition (per student)."

Now according to https://dfi.wi.gov/Pages/EducationalSer ... ogram.aspx :
The 365-Day Rule effects the tax treatment on contributions when a withdrawal is made within a 365-day period. Two examples: (1), Pat opens an account with $2,000 in December 2022 and subtracts on their 2022 tax return. In August 2023, $1,000 is withdrawn for qualified college expenses. Since the $1,000 had not been in the account for 365 days, $1,000 is then added back as taxable income on their 2022 tax return. (2) Same situations as above, but the account was open with a $1,000 balance in 2021, before the 2022 addition of $2,000. In this case, the withdrawal would be considered as taken from the older money outside of the 365-day window and is not reported as income on 2022 taxes. This method often follows "first-in, first-out accounting principles.
So it sounds like you can receive a tax break for K-12 private school by contributing the tuition at least 366 days in advance of disbursing it, and you can continue this for the entire education. This of course reduces the amount of the tax break you could save for college, but if you weren't going to use that anyway for whatever reason, it would work.

Am I missing something major?
Private school tuition is directly deductible in Wisconsin (up to $4,000), so as long as your tuition is higher that that, which seems likely, your plan is solid.
Last edited by toddthebod on Mon May 29, 2023 8:09 pm, edited 1 time in total.
Topic Author
bombcar
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Joined: Sun Aug 12, 2007 6:41 pm

Re: "Laddering" a 529 for K-12 private school?

Post by bombcar »

Ah, that makes it easier, you can deduct education expenses directly, though you can't "double dip" and deduct if they're paid from the 529.
miamivice
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Re: "Laddering" a 529 for K-12 private school?

Post by miamivice »

In general, the 529 plan benefits long term investors who have significant gains in their account. I understand some states offer tax deductions, but am not familiar with those.

I don't see the 529 as a very good vehicle for K-12 education for most folks due to the short timeline of investment growth.
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leeks
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Re: "Laddering" a 529 for K-12 private school?

Post by leeks »

miamivice wrote: Mon May 29, 2023 2:51 am In general, the 529 plan benefits long term investors who have significant gains in their account. I understand some states offer tax deductions, but am not familiar with those.

I don't see the 529 as a very good vehicle for K-12 education for most folks due to the short timeline of investment growth.
This thread only makes sense in states that have a tax benefit.

I am in VA, for example, and just opened enough additional 529 accounts that we will be able to deduct $32K from this year's state taxable income.

$12k of that will stay as college savings for our 2 kids.

$20k will be taken back out at the end of the year as reimbusement of partial tuition for their private school. That portion is invested in something like a money market so will not have a lot of earnings before withdrawal. We don't have a 365 day waiting period.

I expect the result to be $1,840/year saved in state taxes.
SpicyUnagi
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Re: "Laddering" a 529 for K-12 private school?

Post by SpicyUnagi »

WI 529 Money Market is paying next to nothing. Very upsetting they haven't put a fund into the group for just T-Bills or whatever at 5%. There is no laddering anything.

Have to wait 366 days from normal deposit to withdraw for tuition, which I turn right around and dump into VG Taxable VUSXX since I'm reimbursing myself. I've stopped using it due to BS rules. State tax deduction against income is saved on X dollars in VUSXX vs earning what is <2% money market for a fixed amount of dollars in 529 annually ($3840 now?) to save a fixed $~209 per person. Taxable wins via Money Market at minimum risk at VG, since you are not limited by some arbitrary contribution amount.
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