If you have children, you likely know how important it is to save for the enormous cost of college. One of the most powerful college savings tools is the Section 529 plan. But though 529 plans offer significant financial and tax benefits, they also involve some risk.
Historically, one of the biggest risks was the potential loss of tax benefits and imposition of tax penalties if funds weren’t spent on “qualified higher education expenses.” That could happen, for example, if a plan beneficiary chooses not to attend college or receives a full scholarship, and there’s no eligible family member who could be named a replacement beneficiary. Fortunately, Congress has taken steps to mitigate this risk — most recently with the One Big Beautiful Bill Act (OBBBA).
Plan Basics
Section 529 plans are tax-advantaged investment accounts, sponsored by states or state agencies, and designed to help families save for tuition and other educational expenses. Contribution limits are usually generous: Lifetime contribution limits can reach as high as $500,000 or more per beneficiary, though limits vary by state.
Cash contributions to 529 plans are nondeductible for federal tax purposes, but the funds invested in these plans grow on a tax-deferred or tax-free basis. Withdrawals are tax-free so long as they’re used for qualified higher education expenses. In addition, many states offer tax deductions or credits for contributions to the plans they sponsor. If you use 529 plan funds for nonqualified expenses, the earnings portion of the withdrawal is subject to income tax, plus a 10% penalty.
Legislative Provisions
In 2017, the Tax Cuts and Jobs Act (TCJA) expanded qualified education expenses to include up to $10,000 per year in K–12 tuition. Then, the SECURE 2.0 Act of 2022 made it possible to roll over some unused 529 plan funds tax-free into a Roth IRA for the beneficiary. (See “Try a Tax-Free Rollover” below.) The original SECURE Act enabled accounts to be used to pay up to a lifetime maximum of $10,000 in student loan principal and interest per beneficiary.
More recently, the OBBBA doubled the amount that can be spent on qualified K–12 expenses and extended those expenses beyond tuition. It also expanded the types of post-high-school education expenses that qualify to include certain credentialing programs. (Previously, some short-term credentialing programs were eligible, provided they were offered by a community college.)
More Rewards, Less Risk
By significantly expanding the options for spending 529 plan funds, the OBBBA makes the plans more attractive and less risky. Qualified expenses now include up to $20,000 per year in K–12 expenses. In addition to tuition, eligible expenses include:
• Books, instructional and curriculum materials,
• Online educational materials,
• Tutoring services that meet certain requirements,
• Fees for certain standardized tests,
• Fees for college-level courses taken during high school, and
• Educational therapies provided by licensed providers for students with disabilities (for example, behavioral or speech therapy).
Expenses for recognized post-secondary credentials include:
• Tuition, fees, books, supplies and equipment,
• Fees for testing, if required to obtain or maintain a credential, and
• Expenses for continuing education, if required to maintain a credential.
Credentials should be offered by recognized vocational or technical school programs, such as those that provide training to become an auto mechanic, plumber, electrician, HVAC technician or welder. For credentials or credential programs to be recognized, they must meet certain requirements spelled out in the OBBBA. For example, a program is usually recognized if it’s in the U.S. Department of Veterans Affairs’ Web Enabled Approval Management System database or it’s approved by a federal or state government agency.
Credentialing expenses may also include those associated with professional licenses and certifications. This could be, for instance, fees for the bar exam or CPA exam review and registration costs, or continuing education expenses required to maintain a professional license.
Try a Tax-Free Rollover
Unused Section 529 college savings plan funds don’t necessarily need to trigger taxes and penalties. Instead, you can now roll yours over tax-free into a Roth IRA for the benefit of the beneficiary. Be aware, however, that rollovers are subject to several strict requirements:
• Total rollovers can’t exceed $35,000 per beneficiary,
• Your 529 plan must have been opened at least 15 years before the rollover is executed,
• Rollovers can’t include contributions made within the preceding five years or earnings on those contributions, and
• Rollovers must be executed through a direct trustee-to-trustee transfer.
Even if you follow all the requirements, your 529-to-Roth IRA is subject to the usual annual limits on Roth IRA contributions. In 2026, that’s the lesser of either 1) $7,500 ($8,600 if you’re age 50 or older), or 2) the beneficiary’s earned income.
Flexible Tool
As enhanced by the OBBBA, 529 plans can be highly flexible tools that help finance college, elementary, secondary and vocational education expenses in a tax-advantaged manner. Combined with student loan repayment and Roth IRA rollover options, these plans are more attractive than ever as long-term financial planning vehicles. Contact us to discuss your options for paying for college.
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