NEWS
The One Big Beautiful Bill Act, signed into law on July 4, 2025, makes major updates to how families can use 529 plan funds. With new flexibility for K–12 and career training expenses, the law marks the most significant shift in education savings rules since the Tax Cuts and Jobs Act of 2017.
Starting January 1, 2026, families will be allowed to withdraw up to $20,000 per student annually for K–12 education expenses using a 529 plan. This represents a significant increase from the previous $10,000 cap and reflects a push to make tax-advantaged education funding more flexible throughout a child’s academic life.
Qualified expenses include private school tuition, standardized test fees, curriculum and materials, and tutoring or instructional classes. This change may benefit families with multiple children in private or alternative schools by significantly expanding the tax-free withdrawal room each year.
The law also adds new types of post-high school education to the list of eligible uses for 529 plans. Qualified expenses now include costs for credentialing programs, trade schools, professional licenses, and apprenticeships. These are classified as recognized postsecondary credentials under federal guidelines.
Families can now use education savings to support students pursuing non-degree paths, including vocational schools and community colleges, without penalty. This offers new planning options for those who do not plan to attend traditional four-year universities.
Despite the expanded uses, the core tax treatment of 529 accounts remains unchanged. Contributions remain non-deductible at the federal level. However, investment earnings continue to grow tax-deferred, and withdrawals for qualified education expenses are still exempt from federal income tax.
This structure remains one of the most potent benefits of a 529 savings plan. Even without an upfront deduction, tax-free growth over many years can result in substantial savings compared to a taxable investment account.
While the federal tax treatment is consistent nationwide, state tax benefits vary. Some states offer deductions or credits for contributions to a 529 plan account. Others may not be aware of the new federal definitions for qualified expenses, which could lead to unexpected state tax liability for withdrawals.
Families should verify whether their state's laws conform to federal law and review their eligibility for state income tax deductions. These benefits may apply differently depending on the state of residence and the type of education expense.
The 529 savings plan was created to help families prepare for college tuition costs through a tax-advantaged investment plan. Over time, Congress expanded the list of eligible expenses to include room and board, books, and computers. In 2017, K–12 tuition was added with a $10,000 cap.
The One Big Beautiful Bill Act marks another expansion, aiming to adapt education savings to modern realities. With the rising demand for career education, technical training, and alternative pathways, the law reflects a broader definition of what constitutes legitimate education spending.
The new law also made permanent the ability to roll over unused 529 funds into ABLE accounts. These accounts allow individuals with disabilities to save without affecting eligibility for specific federal assistance programs. This change gives families greater confidence when saving, knowing that funds can be repurposed in case of life changes.
A financial advisor emphasized that the new rules make 529 plans more usable without changing their long-term value. The flexibility allows savers to access their funds earlier while still benefiting from tax-deferred growth over time.
A tax consultant warned that state-level mismatches could create confusion, as a withdrawal that is tax-free at the federal level may still trigger state income tax or penalties, depending on the account holder's state of residence.
A parent of three noted that the increased K–12 withdrawal limit will help cover tutoring and curriculum costs, which previously required out-of-pocket spending even when a 529 account was available.
With expanded K–12 access, families may need to adjust their investment portfolios. Age-based portfolios that assume college use at age 18 may be too aggressive for accounts intended for use during middle school or high school. Shorter time horizons mean lower risk tolerance.
Savers should also consider splitting funds across multiple 529 accounts if they plan to use the funds for both K–12 and higher education. Balancing savings goals between early withdrawals and long-term growth is now a more critical part of plan management.
Because state tax conformity isn’t automatic, families must confirm what expenses qualify under their own state’s rules. Even within the same state, different programs may have distinct guidelines. Contacting the state 529 plan administrator is the best way to clarify benefits and limits.
If a state does not recognize the new definitions of qualified expenses, families could face clawbacks on previous deductions or owe tax on distributions they believed were tax-free.
The IRS is expected to issue further guidance in 2026 to clarify the documentation required for new expense categories, such as credentialing and professional licensing. Until then, families should keep detailed records and consult qualified advisors before withdrawing funds under the new provisions.
Planning is essential as education savings plans become more versatile. Families should consider how the new law fits with other savings vehicles, such as Roth IRAs or taxable accounts, and how 529 funds affect financial aid eligibility.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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