What Is a 529 Plan?
A 529 plan is a tax-advantaged savings vehicle designed to help families save for future education expenses. While contributions are not deductible for federal income tax purposes, the investments within the account grow tax-free, and qualified withdrawals are generally exempt from federal income tax.
Qualified education expenses may include tuition, fees, books, supplies, required equipment, room and board for eligible students, certain K-12 education costs, apprenticeship program expenses, limited student loan repayments, and expenses associated with eligible postsecondary credentialing programs. If funds are used for non-qualified expenses, the earnings portion of the distribution may be subject to ordinary income tax and a 10% federal tax penalty.
In addition to the federal tax advantages, many states offer income tax deductions or credits for contributions to qualified 529 plans, although the specific rules and benefits vary by state. As a result, 529 plans can serve as an effective tool not only for education funding but also for broader financial and estate planning strategies.
Recent legislative changes, including provisions under the One Big Beautiful Bill Act (OBBBA) and SECURE 2.0, have expanded the flexibility of 529 plans, allowing funds to be used for a wider range of educational, career development, disability planning, and retirement savings opportunities.
Key OBBBA Updates
Increased K-12 Education Limits
The annual tax-free distribution limit for K-12 education expenses has increased from $10,000 to $20,000 per beneficiary. Eligible expenses include those associated with enrollment or attendance at public, private, and religious elementary or secondary schools.
Expanded K-12 Qualified Expenses
Qualified K-12 expenses now extend beyond tuition and may include:
- Structured homeschool curriculum
- Tutoring services
- Online educational materials
- Fees for standardized tests, including AP exams and college admission tests
- Dual-enrollment course fees
- Certain educational therapies and services for students with disabilities
Postsecondary Credentialing and Workforce Training
529 plan funds may now be used for recognized postsecondary credentialing and vocational training programs. Qualified expenses include tuition, fees, books, supplies, and equipment required to complete eligible programs, providing greater support for alternative educational and workforce development pathways.
Eligible Licensing and Credentialing Costs
Qualified expenses may also include:
- Professional examination and licensing fees for initial certifications, board examinations, and professional registrations such as CPA, nursing, and bar examinations.
- Program-related expenses, including tuition, required books, supplies, and equipment for industry-recognized trade or technical programs.
- Continuing education requirements necessary to maintain professional licenses or certifications.
ABLE Account Rollovers
Tax-free rollovers from a 529 plan to an ABLE account for a beneficiary or an eligible family member with disabilities are now permanently authorized. This enhancement provides additional flexibility for families planning for the long-term financial needs of individuals with disabilities.
Roth IRA Rollovers
SECURE 2.0 introduced the ability to roll certain unused 529 plan assets into a Roth IRA for the beneficiary, subject to applicable eligibility requirements and lifetime rollover limits. This provision helps address concerns about overfunding a 529 account while creating an additional opportunity for long-term retirement savings.
How McConnell Jones Can Help
529 plans are evolving into much more than college savings accounts with the expanded benefits and can now play a broader role in family education and wealth planning. Contact us to discuss how these expenses 529 provisions may benefit your family’s financial strategies.
About McConnell Jones
Founded in 1987, McConnell Jones (MJ) is a nationally recognized CPA firm delivering Assurance, Tax & Accounting, and Advisory services across a broad range of industries. Headquartered in Houston, Texas with offices in Washington, DC; Dallas and Austin, Texas; Durham, North Carolina; and Atlanta and Columbus, Georgia, MJ provides integrated, high-quality solutions backed by specialized expertise and a client-focused approach.
Tax Disclaimer: This communication is for general informational purposes only and is not intended as tax advice. Application of tax laws depends on specific facts and circumstances. Please consult your tax advisor before taking action.