The recent changes to federal 529 plan rules have generated a lot of excitement—and a lot of confusion.
We’ve already had clients ask, “Great! So I can take $20,000 per year out of my 529 plan for my child’s private school tuition completely tax-free.”
The answer is:
Yes—for federal taxes.
Not necessarily—for California taxes.
That’s an important distinction that could cost California families money if they aren’t careful.
What Changed?
Beginning in 2026, federal law doubled the annual amount that can be withdrawn from a 529 plan for K-12 education from $10,000 to $20,000 per beneficiary. In addition, the list of qualified expenses expanded beyond tuition to include certain books, curriculum materials, tutoring, standardized testing fees, dual-enrollment courses, and certain educational therapies.
For families in many states, that’s terrific news.
Unfortunately, California is different.
California Did NOT Adopt These Changes
While the IRS considers these withdrawals qualified under federal law, California has not conformed to the expanded federal rules. As a result, a withdrawal that is completely tax-free on your federal return may still create a California tax bill.
In other words:
- Federal: Qualified K-12 withdrawals may be tax-free.
- California: The earnings portion of the withdrawal may still be treated as a nonqualified distribution.
What Does That Mean?
Suppose you withdraw $20,000 from your 529 plan to pay private school tuition.
Let’s say that withdrawal consists of:
- $15,000 of your original contributions
- $5,000 of investment earnings
Here’s how it’s treated:
Federal Tax Return
- No federal income tax on the earnings.
- No federal penalty.
California Tax Return
- The $5,000 of earnings is taxable as California income.
- California also imposes an additional 2.5% tax on the earnings portion of a nonqualified distribution.
Many families assume “tax-free” means tax-free everywhere. In California, that’s simply not the case.
Does This Mean You Should Never Use a 529 for Private School?
Not necessarily.
Every family’s situation is different.
Factors to consider include:
- How much appreciation is in the account.
- Your California income tax bracket.
- Whether you’ll still need those funds for college.
- Whether preserving decades of tax-free growth for higher education provides a greater long-term benefit.
Sometimes using the 529 still makes sense.
Sometimes paying K-12 tuition from cash flow and preserving the 529 for college results in a better overall outcome.
The answer depends on the numbers—not the headlines.
The Bottom Line
The new federal law is a welcome enhancement to 529 plans, but California families should be careful not to assume the state follows the same rules.
Before withdrawing funds for private K-12 education, it’s worth reviewing the potential California tax consequences so there are no surprises at tax time.
As with many tax planning opportunities, understanding the difference between federal law and California law can save you from making an expensive mistake.
Questions about your 529 plan?
If you’re considering using your 529 account for private K-12 education or other educational expenses, we’d be happy to review your situation and help you determine the most tax-efficient strategy for your family.
You can schedule a strategy session to talk about your unique situation and how we might be able to help. If you are a current client, contact us for a personal review of your situation at info@astifinancial.com.