The One, Big, Beautiful Bill Act (OBBBA) introduced sweeping tax changes, and one of the most impactful areas for families is the expansion of 529 education savings plans.
Traditionally seen as college-focused tools, 529s are now more versatile than ever—helping parents, grandparents, and even adult learners fund a broader array of education expenses tax-free.
Here’s a breakdown of how OBBBA reshapes 529 planning and what it means for families, professionals, and estate planning strategies.
Keep in mind that many states, including California, do not conform to OBBBA expanded treatment of 529 plan distributions. These distributions may be eligible under federal law but will need to be reviewed at the state level for treatment.
Higher Withdrawal Limits for K-12 Education
Prior to OBBBA, tax-free 529 withdrawals for K-12 education were capped at $10,000 annually per student. Starting in tax year 2026, the cap doubles to $20,000 per student per year.
This increase benefits:
- Parents using 529s for private or religious school tuition
- Grandparents funding tuition as part of wealth transfer planning
- Families balancing both K-12 and future college savings
The higher cap allows more flexibility without triggering taxable distributions at the federal level. California does not conform to these expanded federal rules. Withdrawals for these expenses are considered non-qualified distributions for state purposes and are subject to California state income tax on the earnings portion, plus an additional 2.5% state penalty tax. Other states including Colorado, Hawaii, Illinois, and Michigan also do not treat K-12 education as qualified.
Expanded Definition of “Qualified” K-12 Expenses
Perhaps the most transformative change is the broader list of qualified K-12 expenses. Families can now use 529 funds for:
- Books, curriculum, and instructional materials
- Online learning tools
- Standardized testing fees (SAT, ACT, AP exams)
- Tutoring services (with enhanced qualification rules)
- Dual-enrollment college courses
- Educational therapies for special needs
This expanded list significantly eases financial burdens for families who homeschool, pay for extra academic support, or cover specialized therapies.
Again, state treatment should be evaluated before making the distribution.
Enhanced Tutoring Requirements
To qualify for tax-free 529 withdrawals, tutoring expenses must meet new IRS guidelines:
- Tutors cannot be related to the student
- Services must occur outside the home at a recognized tutoring facility
- Tutors must hold specific professional credentials (with Treasury guidance forthcoming)
- Tutoring must align with curriculum or standardized test prep
Families relying on supplemental learning services should carefully track compliance to preserve the tax benefits.
Postsecondary and Credentialing Programs
OBBBA extends the reach of 529s beyond traditional college pathways. Tax-free withdrawals now apply to credentialing and professional programs, such as:
- Workforce Innovation and Opportunity Act (WIOA) programs
- Apprenticeships
- State-licensed certifications (e.g., HVAC, cosmetology, massage therapy)
- Continuing education tied to professional licensing
This expansion transforms the 529 from a “college-only” savings vehicle into a lifelong career investment tool, ideal for career-changers, adult learners, and professionals maintaining credentials.
California conforms to these expenses under AB 340.
Planning Considerations for Tax Practitioners
Early Education Opportunities
Families can maximize the expanded $20,000 annual cap by covering dual-enrollment courses, tutoring, or therapies, reducing future college costs in a tax-efficient way.
Professional Development Funding
Advisors should highlight the expanded eligibility for vocational programs and continuing education, positioning 529s as tools for lifelong learning and workforce advancement.
Coordination with SECURE 2.0 Provisions
OBBBA changes work alongside existing SECURE 2.0 rules, such as the ability to roll over up to $35,000 from a 529 to a Roth IRA, offering additional flexibility for unused funds.
California does not conform to the federal law allowing tax-free and penalty-free rollovers from a 529 plan to a Roth IRA. For California taxpayers, the earnings portion of the rollover is considered a non-qualified withdrawal and is subject to state income tax plus an additional 2.5% state penalty.
Estate and Gift Tax Planning with 529s
OBBBA doesn’t alter the long-standing estate and gift tax benefits of 529s:
- Contributions are treated as completed gifts to the beneficiary
- Annual contributions up to $19,000 per donor ($38,000 for couples) qualify for the gift tax exclusion in 2025 and 2026
- Donors can use the five-year election to contribute up to $95,000 ($190,000 for couples) in one year without immediate gift tax consequences
These rules make 529s a powerful tool for intergenerational wealth transfer, especially as higher withdrawal caps encourage larger funding levels.
The Bottom Line
The OBBBA fundamentally broadens the usefulness of 529 plans:
- Higher annual K-12 withdrawal limits ($20,000 starting 2026)
- Expanded list of qualified expenses (books, tutoring, therapies, dual-enrollment)
- Coverage for credentialing and professional development
- Planning implications across estate, financial aid, and state tax conformity
With these changes, 529s are no longer just for college, they’re flexible, multi-generational tools for education and career growth.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.
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