Section 529 Plans After the One Big Beautiful Bill Act

Over the last several legislative cycles, Congress has steadily expanded what clients can do with Section 529 plans. The One Big Beautiful Bill Act (OBBBA) continues that trend in a meaningful way. At this point, 529s are no longer just college savings vehicles. They are flexible education‑funding tools that can support K-12 education, credentialing and licensing programs, special education needs and, if funds are left over, alternative planning paths such as beneficiary changes, ABLE rollovers or Roth IRA rollovers.

From a planning perspective, OBBBA materially reduces the risk of overfunding a 529 and strengthens the case for using 529 plans earlier, funding them more aggressively and viewing them as longer‑term, multigenerational planning vehicles rather than single‑beneficiary college accounts.

Background

Before the Tax Cuts and Jobs Act (TCJA), 529 plans were relatively straightforward. Contributions were made with after‑tax dollars, growth was tax‑free and distributions were tax‑free only if used for qualified higher education expenses. These expenses were generally tuition, fees, books, supplies and certain room and board costs at eligible postsecondary institutions.

That framework worked well for traditional college planning, but it came with a real drawback: if the beneficiary didn’t attend college, received significant scholarships or simply didn’t need all the funds, excess distributions triggered income tax and a 10% penalty on earnings. That “what if we overfund?” concern often capped how aggressively clients were willing to use 529 plans.

TCJA: The First Big Shift

The TCJA was the first major expansion. By allowing up to $10,000 per year, per beneficiary, of tax‑free 529 distributions for K-12 tuition, Congress effectively moved 529s earlier in the education timeline.

That change made 529s more relevant for families paying private school tuition, but it was still fairly narrow. The $10,000 cap applied only to tuition, not to the broader set of education‑related costs families actually incur. State conformity issues also limited how widely the provision was used in practice.

Still, the TCJA marked a philosophical shift: 529 plans were no longer just about college.

What the OBBBA Changes

OBBBA builds on that shift and significantly broadens the utility of 529 plans. First, beginning in 2026, the annual federal cap on K-12 distributions doubles from $10,000 to $20,000 per beneficiary. For families paying private elementary or secondary school tuition, that alone makes 529s far more impactful as a cash flow planning tool.

Second — and more importantly — OBBBA expands the definition of K-12 qualified expenses beyond tuition. Tax‑free distributions can now be used for specified education‑related costs such as curriculum and instructional materials, standardized testing fees, qualifying tutoring, dual‑enrollment fees and certain educational therapies for students with disabilities. This aligns the statute much more closely with how families spend money on K-12 education.

Third, OBBBA expands qualified higher education expenses to include certain postsecondary credentialing and licensing programs. That means 529 funds can be used for tuition, fees, books, supplies, required equipment and related testing or continuing education for recognized credential programs — not just traditional degree programs. This is a meaningful change for beneficiaries pursuing trades, certifications or later‑in‑life career transitions.

Finally, OBBBA makes permanent the ability to roll 529 assets into ABLE accounts, eliminating a prior sunset and giving families with disabled beneficiaries longer‑term flexibility.

Separately, and independent of OBBBA, current law permits limited rollovers of unused 529 plan assets to a Roth IRA for the beneficiary, a rule added under SECURE 2.0 and effective beginning in 2024. While this option provides a useful backstop for excess 529 balances, it is subject to significant constraints, including a lifetime rollover cap, annual Roth contribution limits, earned‑income requirements and minimum account‑age and seasoning rules. As a result, the Roth rollover should be viewed as a supplemental planning option rather than a primary justification for overfunding a 529 plan.

Planning Opportunities

From a planning standpoint, the cumulative effect of these changes is significant. The biggest takeaway is that the “overfunding risk” that historically limited 529 contributions is materially lower than it used to be. Between expanded K-12 uses, credentialing programs, ABLE rollovers, beneficiary changes and Roth IRA rollover options added in prior legislation, there are now multiple viable off‑ramps if education spending doesn’t unfold as originally expected.

For high‑net‑worth families, this makes front loaded 529 funding — using the five‑year gift tax averaging election — easier to justify. Larger balances can be defended when clients expect to use funds across multiple education stages or across multiple beneficiaries over time.

Practically, advisers should think of 529 plans less as single‑child, college‑only accounts and more as family education pools that can be redeployed as circumstances change.

Key Takeaways

The evolution from pre‑TCJA to TCJA to OBBBA reflects a clear legislative direction: Congress wants 529 plans to be flexible, widely usable education savings vehicles. After OBBBA, 529 plans are easier to use, harder to “mess up” and more defensible as a core planning tool.

As a result, we should expect to see them play a larger role not just in college planning but in broader family, estate and cash‑flow planning conversations going forward.

For more information on how these changes may affect your education or estate planning strategy, contact us. Our tax team is here to help you evaluate opportunities and structure 529 plans with greater confidence and flexibility.

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