One of the best ways to save and pay for your child’s or grandchild’s education just got even better. 529 college savings plans are the workhorse of college savings for US households—about 17 million families participate in 529 plans, which have an average account balance of $30,961 and hold a total of more than a half trillion dollars.
Good news: New federal legislation in the One Big Beautiful Bill Act (OBBBA) has given 529 plans a dramatic makeover, broadening their use to far beyond just saving for college.
Bottom Line Personal asked college and financial aid expert Mark Kantrowitz how to take advantage of the changes…
How Does a 529 Plan Work?
These state-administered, tax-advantaged plans function like an IRA for college, helping parents and students save for post-secondary education. Money deposited in 529 accounts grows tax-free and can be withdrawn federally tax-free when spent on eligible expenses such as tuition, room and board, books and supplies. (Earnings withdrawn for ineligible costs are taxed as income, plus a 10% penalty.)
There is no annual limit on how much you can contribute to a 529 plan, but contributions are subject to federal gift tax rules. That means in 2025, you can give up to $19,000 per year per beneficiary without triggering the gift tax (this limit is doubled for married couples filing jointly). You even can make a lump-sum contribution of up to $95,000 in one year and treat it as if it were spread over five years for gift-tax purposes.
Each state offers its own 529 plan, which typically invests in variety of portfolios, including stocks, bonds and age-based options that automatically adjust their investment strategy to become more conservative as the beneficiary approaches college age.
In recent years, the federal government has expanded the flexibility of 529 plans, addressing concerns that many families have regarding what happens if their child elects not to go to college. Example: The 529 account owner is allowed to change the beneficiary to another eligible family member, including himself/herself, without penalty. Unused 529 plan assets (up to a lifetime limit of $35,000) can be rolled over into the beneficiary’s Roth IRA, tax- and penalty-free, if certain conditions are met, such as the 529 account having been open for at least 15 years. These rollovers are subject to annual Roth IRA contribution limits.
Important: You’ll have to report all your savings in parent-owned 529 plans on financial-aid forms including the Free Application for Federal Student Aid (FAFSA) since a parental asset could impact aid eligibility. Plans that are owned by others, such as grandparents, don’t have to be reported and won’t impact student-aid awards.
What’s New for 529 Plans?
For decades, 529 accounts have been synonymous with saving for college. But new legislation in the OBBBA that went into effect this past July has turned them into wide-ranging education savings accounts. The shift acknowledges that students now are pursuing many high-demand, well-paying technical careers and skilled trades that require postsecondary education but not necessarily a four-year college degree. That means you can use proceeds from your 529 plan to pay for…
Post-high school credentials offered by a vocational, trade or technical school in which study leads to certification or licensing. These include: Auto mechanics, aviation-maintenance…cosmetology… dental hygiene…food safety…heating and air-conditioning…massage therapy…plumbing…and welding. 529 withdrawals can cover tuition and other fees, books and supplies necessary for these credential programs. In general, the institution or program must be accredited by an organization recognized by the Department of Education or credentials and programs authorized under the Workforce Innovation and Opportunity Act (WIOA).
Testing and continuing-education costs in fields that typically require a bachelor’s degree or higher. Examples: Exams to become a certified public accountant (CPA)…state bar exams required to practice law…and mandatory continuing-education credits for maintaining professional licenses for doctors, teachers, pharmacists, engineers and financial planners.
Broad range of kindergarten-through-high-school expenses. Under a federal tax law passed in 2017, up to $10,000 a year could be withdrawn from a 529 account tax-free to pay for presecondary tuition at public, private or religious schools. Starting January 1, 2026, the OBBBA increases the limit to $20,000 a year. Starting July 4, 2025, it also now allows parents to use 529 money for K-12 curriculum materials such as certain tutoring services, online educational tools and/or platform subscriptions, fees for standardized tests such as the SAT, ACT and AP, dual-enrollment fees for college-level courses taken during high school and educational therapies for students with disabilities.
