- The K-12 annual withdrawal limit doubles to $20,000 per beneficiary starting in 2026, and eligible expenses now include tutoring, testing fees, and dual enrollment.
- 529 funds can now be used tax-free for certain workforce training and credentialing programs, not just traditional college.
- 529-to-ABLE account rollovers are now permanent, offering flexibility for beneficiaries with disability-related needs.
- Using 529 funds for all tuition can unintentionally reduce eligibility for the American Opportunity or Lifetime Learning Credit; paying some tuition out-of-pocket may unlock a larger credit.
- Unused 529 funds can repay up to $10,000 in student loans, or roll into a Roth IRA (up to $35,000 lifetime) if the account is 15+ years old.
What Taxpayers Need to Know About 529 Plan Changes
529 education savings plans have become one of the most popular ways for families to save for education expenses. Recent changes under the One Big Beautiful Bill Act (OBBBA) further expand the flexibility of these accounts, creating new planning opportunities for families with children in elementary school, high school, college, and certain workforce training programs.
Understanding these changes can help taxpayers maximize tax benefits while avoiding unexpected tax consequences.
Expanded Qualified Education Expenses
Historically, 529 plans could be used tax-free for qualified higher education expenses such as college tuition, fees, books, supplies, and certain room and board costs. Before OBBBA, tax free distributions of up to $10,000 per beneficiary per year for K-12 was allowed. OBBBA expands the categories of eligible K-12 expenses and increases the annual aggregate K-12 limit to $20,000 per beneficiary beginning in 2026.
The One Big Beautiful Bill Act broadens the definition of qualified education expenses for K-12 students. In addition to tuition, eligible expenses may now include certain costs associated with:
- Curriculum and instructional materials
- Books and educational software
- Online educational resources
- Licensed teacher tutoring and educational therapies (occupational, behavioral, physical, or speech language therapies)
- Standardized testing fees
- Dual enrollment programs
- Other qualifying educational expenses as defined by the law
These expanded provisions provide families with greater flexibility in using 529 funds throughout a student’s educational journey.
Workforce and Credentialing Programs
The legislation also expands 529 plan usage beyond traditional college pathways. Tax-free withdrawals may now be used for certain recognized workforce training and credentialing programs, helping individuals gain skills and certifications needed for today’s job market.
This change acknowledges that higher education is no longer limited to four-year degree programs and allows families to use education savings for a wider variety of career development opportunities.
Additional Flexibility for 529-to-ABLE Rollovers
OBBBA permanently extends the ability to roll over unused 529 plan funds to an Achieving a Better Life Experience (ABLE) account for the same beneficiary or a qualifying family member. An ABLE account is a tax-advantaged savings and investment account that allows individuals with disabilities to save money without losing eligibility for vital government programs like Medicaid and Supplemental Security Income. To qualify, the rollover generally must be completed within 60 days, and the amount transferred counts toward the ABLE account’s annual contribution limit; for 2026, that limit is $20,000. This can provide additional flexibility where a beneficiary or family member has qualifying disability-related needs.
Tax Planning Opportunity: Coordinate 529 Withdrawals with Education Credits
One of the most valuable tax planning strategies involves coordinating 529 plan distributions with federal education tax credits.
Many taxpayers automatically use 529 funds to pay college tuition. However, when additional funds are needed outside of the 529 plan to cover other qualified expenses, using just the 529 plan for the tuition may unintentionally reduce or eliminate eligibility for valuable education credits such as the:
- American Opportunity Tax Credit (AOTC)
- Lifetime Learning Credit (LLC)
It is also important to remember that withdrawing amounts from a 529 plan that are not used for qualified expenses will have earnings treated as taxable income and will be subject to a 10% penalty on the year of distribution.
Because the same educational expense cannot be used both for a tax-free 529 distribution and for an education credit, taxpayers should carefully allocate which expenses are paid with the 529 plan funds and those paid through other sources in order to maximize the tax benefits
Example Strategy
A family has a college student who qualifies for the American Opportunity Tax Credit.
Rather than using 529 funds to pay all tuition expenses, the family may benefit from:
- Paying sufficient tuition expenses out-of-pocket (cash, savings, loans, etc.) to maximize the available education credit.
- $4,000 of qualified educational expenses not paid with a 529 plan, grant or scholarship can qualify for the max American Opportunity Tax Credit of $2,500.
- Using 529 funds to pay for other qualified expenses such as:
- Room and board (if enrolled at least half-time)
- Required books and supplies
- Computers and related equipment
- Other qualified expenses
This approach may allow the family to receive both:
- Tax-free growth and distributions from the 529 plan, and
- A valuable federal tax credit.
Since the American Opportunity Tax Credit can provide up to $2,500 per eligible student each year, coordinating these benefits can produce meaningful tax savings.
Watch for Taxable Scholarships
Another area that frequently causes confusion involves scholarships and grants.
A 529 plan distribution can still be made in a year the beneficiary receives a scholarship, but families should coordinate the withdrawal carefully. Tax-free educational assistance—such as the tax-free portion of scholarships, fellowships, Pell grants, veterans’ benefits, and employer-provided educational assistance—generally reduces the qualified education expenses available to support a tax-free 529 distribution. If 529 funds are withdrawn because the beneficiary received a scholarship, the withdrawal may qualify for an exception to the 10% additional tax to the extent the distribution does not exceed the scholarship amount; however, any earnings portion not matched to remaining qualified education expenses may still be treated as taxable income.
Scholarships used for qualified tuition and required course-related expenses are generally tax-free. However, scholarship funds used for nonqualified expenses—or scholarship amounts that exceed qualified tuition and required fees—may become taxable income to the student.
Common examples of potentially taxable scholarship amounts include funds used for:
- Room and board
- Travel expenses
- Optional equipment
- Living expenses
Planning Consideration
In some situations, intentionally treating a portion of a scholarship as taxable income may allow parents or students to claim a larger education credit, resulting in an overall lower family tax burden. These calculations can be complex and should be evaluated on a case-by-case basis.
Additional Planning Options for Unused 529 Funds: Student Loans and Roth IRA Rollovers
In addition to expanded qualified expenses, families with leftover 529 funds may have other planning options. First, 529 plan distributions can be used to repay qualified education loans (including certain loans of the beneficiary or the beneficiary’s sibling), but the total amount treated as a qualified education expense for student loan repayment is capped at $10,000 over the beneficiary’s lifetime; also note that the student loan interest deduction generally is not available for any 529 distribution used to pay interest on those loans.
Second, under the SECURE 2.0 rules, certain unused 529 funds may be rolled into a Roth IRA for the same designated beneficiary via a direct trustee-to-trustee transfer, provided the 529 account has been maintained for more than 15 years; the rollover is subject to the beneficiary’s annual IRA contribution limit and earned-income limit (reduced by other IRA contributions for the year), a $35,000 lifetime cap, and a restriction that amounts contributed within the prior five years (and related earnings) generally can’t be rolled over.
Final Thoughts
The One Big Beautiful Bill Act and Secure 2.0 expand the usefulness of 529 plans by broadening eligible K-12 expenses and extending tax-free treatment to certain workforce training and credentialing programs.
As families evaluate education funding strategies, they should remember:
- 529 plans are now more flexible than ever.
- Coordinate 529 withdrawals with education credits to avoid losing valuable tax benefits.
- Consider paying tuition out-of-pocket when doing so helps maximize the American Opportunity or Lifetime Learning Credit.
- Use 529 funds for other qualified expenses when appropriate.
- Review scholarship awards carefully, as amounts exceeding qualified tuition and required educational expenses may be taxable.
- 529 funds can be used to repay qualified education loans up to $10,000
- Any unused funds can be converted to a ROTH IRA account subject to limitations and holding periods.
Be sure to confirm state conformity to Federal tax law changes regarding the 529 spending as the changes in the OBBBA do not bind the states to make the same changes.
Thoughtful coordination with your trusted tax advisor of these rules can help families maximize tax benefits while reducing the overall cost of education.