Last month, we provided an overview of the key provisions in
the just-signed One Big Beautiful Bill Act (OBBBA).
As we kick off the new school year, we believe this is a
good time to address some of the important changes that were included in the
OBBBA for 529 college savings plans—changes that could significantly affect how
families plan and save for education.
First, let’s define the two main types of 529 plans.
- While
less popular, prepaid tuition plans allow you to purchase
college credits from participating schools for future use. You buy these
credits at today’s rates. When your child is ready to attend college, the
plan allows you to use the credits, even if tuition has risen.
- What
is a 529 college savings plan? The 529 plan, which we
will focus on, is another vehicle that is used to save for education.
While there is no federal deduction when you contribute to a 529 plan,
capital gains, dividends, and interest are not taxed as long as they
remain within the 529 account. Most states with income taxes allow either
a deduction from income or a state tax credit for contributions into a 529
plan.
The funds in a 529 savings plan can be invested in stocks,
bonds, mutual funds, exchange-traded funds (ETFs), money markets, and more. If
you use the funds for qualified education expenses, you won’t pay taxes on
withdrawals.
Currently, college savings accounts hold about $500 billion,
according to the College Savings Plan Network. Despite the large amount of
funds stashed in these accounts, not many people utilize them.
Just over two-thirds of parents save money for their
children’s education in traditional checking or savings accounts, according to
a Vanguard survey of 1,005 parents who have children that are 17 and under
living at home.
Just 10% of parents are leveraging the value of 529 savings
plans for educational expenses their children are likely to encounter, the
survey found. Among millennial parents, the number drops to 8%, while just 6%
of Gen Z parents take advantage of 529 college savings plans.
An OBBBA reboot for 529 college savings plans
- Previously,
parents could withdraw up to $10,000 per year to cover tuition. With the
OBBBA, K-12 qualified expenses—withdrawals that are not
taxed—have been expanded to include:
- Curricular
materials,
- Books
or other instructional materials,
- Online
educational materials,
- Tuition
for tutoring or educational classes outside of the home,
- Fees
for a nationally standardized achievement test, or any college
admissions/entrance exam such as the ACT or SAT,
- Educational
therapies for students with disabilities provided by a licensed or
accredited practitioner.
Tuition includes public, private, or religious elementary or
secondary schools.
Starting January 1, 2026, the total withdrawal amount for
all K-12 expenses will rise to $20,000 per year from $10,000.
- Under
previous law, credential programs were eligible for
tax-free 529 withdrawals only when offered through community colleges or
other eligible institutions.
The new law allows you to use 529 funds for a wider range of
job training and credentialing programs as long as the student is enrolled in a
recognized program.
Credential programs must include one of the following:
- Authorized
by the Workforce Innovation and Opportunity Act,
- Approved
by the federal or state government,
- Aligned
with other approved postsecondary credential organizations, or
- A
military credential.
Qualified withdrawals now include:
- Skilled
trades and vocational programs, such as HVAC certification, welding,
commercial driver’s license, plumbing, electrical work, cosmetology, and
more,
- Professional
license and certification fees, including CPA exam prep and testing fees,
bar exam review and registration, and more,
- Required
continuing education needed to maintain licenses or certification for
nurses, social workers, teachers, real estate agents, and others, and
- Books,
supplies, and equipment.
- Previously
set to expire on December 31, 2025, the provision allowing 529 plan
holders to roll over funds into an ABLE (Achieving a Better Life
Experience) Account for the beneficiary or a qualifying family
member has now been extended indefinitely.
Although not the focus of this month’s newsletter, it’s
worth noting that ABLE Accounts are a savings option that is available to
individuals with disabilities who meet eligibility requirements. These accounts
fall under Section 529A of the Internal Revenue Code and offer tax-advantaged
benefits.
These rollovers are tax-free, offering families greater
flexibility in repurposing education savings for qualified disability-related
expenses.
The ABLE Act allows a person whose disability began before
age 26 (expanding to 46 effective January 1, 2026) to save money in the ABLE
account without affecting most federally funded benefits based on need.
Contribution limits
Unlike IRAs, for instance, contribution limits are not as
clear-cut. For starters, there is no annual federal contribution limit for 529
plans. You can contribute any amount per year, but contributions are considered
gifts for tax purposes.
There are, however, lifetime limits imposed by states. These
are very high and usually do not impact contributions. Georgia is the lowest:
$235,000. Many states have an aggregate limit in excess of $500,000.
In 2025, the annual gift tax exclusion is $19,000 per
beneficiary. A married couple can contribute up to $38,000 without triggering
gift tax reporting.
There’s also a special “superfunding” rule that allows you
to contribute five years’ worth at once—up to $95,000 in 2025—without gift tax
implications, as long as no additional contributions are made for that
beneficiary during the five-year period.
In summary, whether you’re saving for college, vocational
training, or certain credentialing programs, a 529 plan offers flexible,
tax-advantaged options to help you reach your goals.
With recent updates expanding how these funds can be used,
now is a great time to review your strategy.
If you have questions or want help tailoring a plan to your
family’s needs, don’t hesitate to reach out. We’re here to help.
As always, please feel free to check in with your tax
advisor regarding any specific tax questions.
