Raising a child is expensive — there’s just no way around it. According to a report from the United States Department of Agriculture (USDA), the average cost of raising a child to the age of 18 worked out to $233,610 at last count, with the biggest chunks of that cost attributed to housing, food, childcare and education.
However, there are a few ways to avoid the biggest costs involved. That’s why it’s great when you can turn to various financial tips or tricks – such as special tax breaks or legal loopholes – to reduce the burden of parenthood, especially for a huge additional cost like sending your child to private school.
Fortunately, parents and other relatives do have some options that can help offset the cost of private school tuition. These include some non-traditional sources, as well as programs specifically designed to help pay tuition bills. The earlier you begin utilizing these options, the more advantage they’ll offer, especially by allowing your money to compound over time.
How much will private school cost?
Before you can start saving for a goal, you need to have a figure to shoot for. Unfortunately, the money you’ll need to come up with for private school tuition will be on the high side, and that’s especially true if you have more than one child.
While prices can vary around the country, the average yearly tuition for private K-12 schools (and all grades) worked out to $26,000 per year in 2019. That’s up quite a bit from the 2013-14 school year even, when average tuition worked out to $23,372.
This means the amount you need to save will likely grow throughout your child’s primary education years, so it’s more important than ever to hatch a plan and start saving now.
Here are five options that can help you save for private school tuition.
1. Use a 529 plan for long-term savings
While 529 plans were originally created to pay for qualified college expenses, they’re now also available to pay for private school tuition due to the changes from the Tax Cuts and Jobs Act of 2017. For now, this law permits 529 plans to be used to pay qualified tuition expenses for students from kindergarten through high school.
However, Noa Hoffman, CFP, director of editorial and community engagement at Singleton Foundation for Financial Literacy and Entrepreneurship, points out that this change only allows families to use up to $10,000 per child from a 529 plan to pay for K-12 education expenses.
Still, “529 plans are the best option for most people when it comes to saving for private school due to their tax advantages, account controls and low maintenance,” Hoffman says. With that being said, plans differ from state to state and you should check if your home state might offer any special tax benefits for state residents.
Just remember, if you use a 529 college savings plan to pay for private school tuition, the money you save won’t be there when you need to start worrying about college bills.
2. Short-cut your money through a 529
Mark Kantrowitz, publisher and vice president of SavingforCollege.com, says a key issue with using a college savings plan to save for K-12 is the fact you have a shorter time horizon than you do when you’re saving for college. This means you have less time for your savings to compound and grow.
“All 529 plans offer age-based asset allocations or enrollment date funds, which start off aggressive and adopt more conservative investment strategies as college approaches,” Kantrowitz says. “But, you might have to make changes if using them to save for K-12 due to the shorter time horizon.”
You may still have the chance to benefit even if you haven’t let your money grow for any amount of time, although it depends on where you live.
For example, the state of Indiana offers a 20 percent tax credit on the first $5,000 you contribute to an eligible 529 savings plan each year. This means you could contribute $5,000, gain a $1,000 tax credit from the state, then turn around and use the money for private school tuition.
With that being said, make sure to check your state to see if any tax benefits are available to you, and check for state laws that might prohibit this kind of shortcut. It’s important to note this loophole is not available in every state. Of the many states that offer a tax deduction, four states have rules that would prohibit this type of payment shortcut.
3. Set up a UGMA or UTMA account
Parents can derive some tax advantages from custodial accounts established through the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). These accounts allow adults to transfer assets to a minor, who then pay a reduced tax rate on some earnings in the account. These accounts are sometimes used for college tuition, though they’re also available for private school tuition.
According to Hoffman, however, UGMA and UTMA accounts do have one tragic flaw.
“The beneficiary can take control of the account once they reach legal age and they are not required to use the funds for college,” she says.
Another downside of UGMA and UTMA accounts is the “kiddie tax.” Any gains in the account above $2,200 are taxed the same as trusts and estates or at the parent’s marginal tax rate, which makes these accounts unlike 529 plans where gains grow tax-free.
4. Get started early with a Roth IRA
While Roth IRAs are typically used for retirement planning, they are surprisingly flexible, in part because they allow you to take out contributions tax-free, as long as the account has been open for at least five years. Just remember that the same is not true for profits earned in a Roth IRA account. Their biggest benefit, however, is the ability to contribute after-tax money and then never having to pay taxes again on qualified withdrawals during retirement.
Roth IRAs are limited to an annual contribution limit of $6,000 in 2020 (or $7,000 if you’re ages 50 or older), though that number tends to rise every few years. But the advantage here is that parents have the possibility to save even before their child is born, giving money in the account a lot more time to compound tax-free.
According to Hoffman, Roth IRAs can also be a good option since, if you don’t need the money you save for education, you can use the funds for retirement later on.
5. Fall back to a taxable account
If you’ve run out of other options, then you’ll have to fall back to a plain vanilla taxable investment account, which offers no special benefits. It will also hit you with taxes annually on any realized gains such as capital gains, interest or dividends.
In this case, you might consider selecting more aggressive investments like stocks if you have at least five years to invest the money. One tax advantage from owning stocks is that you won’t be liable for capital gains taxes until you actually sell the stock and realize the gain. So if you can let the money ride for years until you need it, you can defer the taxable gain.
Regardless of which path you take to fund your child’s education, it’s smart to begin as soon as possible. That allows you to take the most advantage of all the possible options, but more importantly, it allows your money more time to compound, letting your money earn money. Still, it’s a nice bonus if you can add special tax breaks in addition to doing right by your child.