Big Changes for 529 Plans: What Parents Should Know
Our children just went back to school this last week. They go to a university model school where they are on campus 2 days per week and at home the other days. It’s not for everyone but works great for our family.
For families who use private schools, homeschool, or even those pursuing post-high school job training outside of college, new tax law (The One Big Beautiful Bill Act, more on this next week) brought some under-the-radar benefits. 529 plans are now more flexible. But there is a catch.
There has been a trend over the last 20 years to gradually increase flexibility and reduce limitations on the use of funds in 529 plans. This tax law expanded that flexibility even more.
Here are several examples[i]:
· K-12 expenses: limit doubled from $10,000 to $20,000 per year (effective beginning 2026) and can be applied to books, tutoring, test fees, and homeschooling costs.
· Standardized testing: fees for exams like ACT/SAT and related prep courses
· Certifications and Credentials: Post high school credentials and certifications
· Workforce Training: Apprenticeships, trade schools and other job-related training
So what does this mean for families?
529 plans are taxed like a Roth IRA, contributions to both are made with after-tax dollars and growth tax-deferred. Withdrawals used for qualified education expenses are federally tax-free depending on the plan and state you reside. Unlike a Roth, however, withdrawals not used for qualified education expenses are taxed as ordinary income plus a 10% federal penalty on the gains.
Naturally people are attracted to these accounts because of the tax benefits and pre-funding college in a child’s name. But a limitation to adoption or underfunding is the taxes and penalties if you do not use it for college.
The expansion of the definition of what counts as qualified education expenses means families may now have ways to benefit.
The Catch
Since the tax benefit comes from eliminating taxes on gains, which takes time to build. Contribution to 529 in 2025 and withdrawing in 2026 may not produce a meaningful tax benefit – and if markets are down, you many even lose out on tax benefits.
Also, benefits are the same for everyone. Families in higher income brackets benefit more, while those in lower brackets might consider using a traditional investment account.
How to Think about 529s Going Forward
· A 529 is still best viewed as a college-funding tool, now expanded to cover job training as well
· But if you hit a cash crunch, it can also serve as a flexible back-up for certain education costs along the way.
· You might want to consider using a buffering strategy; in strong market years, draw on the 529 to fund qualified expenses; in down years, use other resources and leave the 529 invested
Overall, the added flexibility should give families more confidence to start funding a 529 plan earlier and more aggressively than before.
If you’d like to discuss how the tax changes have affected your planning, let’s set up a review.
www.calendly.com/andreweppes/review
Have a great weekend!
Andrew Eppes, CFP®
The views and opinions expressed are of Andrew Eppes only. They are not necessarily those of MML Investor Services, LLC. Andrew Eppes is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org. Nexus Advisors, LLC is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. 14241 Dallas Parkway Suite 1200 Dallas, TX 75254 972-348-6300. Neither MML Investors Services, LLC nor any of its subsidiaries, employees or representatives are authorized to give legal or tax advice. Consult your own personal attorney legal or tax counsel for advice on specific legal and tax matters. CRN202809-9353939. [i] https://www.invest529.com/articles-webinars/big-changes-for-529-savers-what-you-need-to-know-about-expanded-uses/