529 plans offer tax-advantaged investment accounts designed to help families save and invest for future education expenses. Accounts enjoy tax-free compounding, and withdrawals are tax-free when used for qualified education expenses or transfers.
Most states offer income tax deductions for contributions at varying levels. With ownership retention, generous funding limits, flexibility in participating and maintaining the accounts, and expansion of uses—from kindergarten to postsecondary education to career training and certifications — they’re a powerful investment vehicle to grow a family’s savings and wealth.
The 2025 Tax Act makes them even better. This discussion provides current and future 529 participants with a summary of what has changed and how account owners can benefit.
Key Points
- K–12 boost: Annual tax-free withdrawals for K–12 school expenses doubled to $20,000 per student (beginning in 2026).
- New K–12 qualified expenses: 529s now cover books, tutoring, testing, therapies, and more, in addition to tuition.
- Career training eligible: Expanded to include certificates, licenses, apprenticeships, and job-skills programs.
- More advantageous than new “Trump Accounts”: Government to seed $1,000 “Trump Accounts” for babies (born 2025–2028), but with limited access and flexibility.
- Gift tax win: The $15M lifetime exemption is now permanent, enabling larger 529 account funding without gift tax.
- ABLE rollover made permanent: Moves up to $19,000/year from 529 to disability-focused ABLE accounts.
- Student loan limits cut: Lower borrowing caps and fewer repayment options make 529s even more vital.
- Leftover funds? Still useful — can roll to a Roth IRA or reassign to another family member, even next generation.
- 529s outperform alternatives: Now even more compelling than prepaid plans, Coverdell ESAs, and new child IRAs in most cases.
Introduction
In early July 2025, Congress passed a sweeping tax reform (the 2025 Tax Act) that significantly expands the benefits of 529 college savings plans. Like past updates to the federal tax code (IRC), this new law makes 529 plans even more attractive by broadening what counts as a qualified education expense.
The changes affect everything from K–12 schooling to vocational training. They also introduce new savings accounts for children and changes to gift and loan rules. This article explains the key changes and strategies families, contributors, and advisors should consider to make the most of 529 plans under the new law.
Changes to 529 Plans under the 2025 Tax Act
Expanded K–12 Education Coverage
- Higher withdrawal limit: Starting January 1, 2026, 529 owners can withdraw up to $20,000 per student per year tax-free for K–12 tuition (twice the previous $10,000 limit).
- New qualified K–12 expenses: In addition to tuition, 529 funds can now cover a variety of school-related costs, including:
- Curriculum and instructional materials (textbooks, software, educational subscriptions).
- Fees for standardized tests (SAT, ACT, AP exams, and other college entrance tests).
- Online learning programs and educational software.
- Therapies for disabilities (occupational, speech, or physical therapy provided by licensed practitioners).
- Tutoring or outside classes (for students, if the tutor or instructor is licensed/qualified and not a relative).
These expansions mean that families can now use their 529 accounts for many K–12 needs beyond just tuition, making early education a larger part of their financial planning strategy.
Expanded Postsecondary and Credential Programs
The 2025 Tax Act now allows 529 account owners to take tax-free withdrawals to pay for a wider range of postsecondary education and training beyond traditional college degrees.
Qualified expenses for recognized credential programs are now eligible
Qualified expenses include tuition, fees, books, supplies, and required equipment for these programs. Testing fees (for exams needed to earn the credential) and continuing education costs (to maintain a credential) are also included.
What qualifies as a recognized program?
A qualified program is one that leads to an industry-recognized credential and is approved by certain authorities. Examples include:
- State or federal workforce-approved training programs (such as those on lists under the Workforce Innovation and Opportunity Act).
- Apprenticeship programs registered with the Department of Labor.
- Vocational or technical school courses leading to professional certificates or licenses (e.g., welding certifications, nursing licenses, IT certifications).
- Any program listed in the Department of Veterans Affairs’ WEAMS training directory, or those recognized by the Treasury/Labor departments.
In short, 529 accounts can now pay for many career-oriented programs and certificate courses that were previously not included. This change allows 529 funds to be applied tax-free for practical education and training aimed directly at job skills and credentials.
Other 2025 Tax Act Changes Impacting Planning With 529 Accounts
New Government-Funded “Children’s IRA” Accounts (“Trump Accounts”)
- Overview: Starting in July 2026, the law creates new custodial retirement accounts for children under 18 years of age. (These have been labeled “Trump accounts”.)
- Government contribution: The U.S. Treasury is to seed each account with $1,000 for qualifying children born during 2025 through 2028.
- Family contributions: Family members (parents, relatives, employers) can add up to $5,000 per year to the account. No earned income is required for the contributions (through age 18).
- Restrictions: No withdrawals (for any reason) are allowed before age 18. After age 18, the account rolls over into a traditional IRA.
- Investment options: The only investment allowed is a low-cost S&P 500 index fund. This means there is no choice of funds, reallocation, or rebalancing—the account growth depends on that single index.
- Purpose and implications: These accounts are designed to encourage saving for future retirement, especially for families who might not otherwise save. However, they come with restrictions: neither the beneficiary or anyone can access the money until adulthood, and neither the child nor the family can change the investment strategy. There are no state income tax deductions or state creditor protections for these accounts.
Permanent $15 Million Gift and Estate Tax Exemption
- New exemption level: The lifetime federal exemption for gift and estate taxes is raised to $15,000,000 per person (effective January 1, 2026) and made permanent. It will continue to adjust for inflation.
- Implication for 529 gifts: Contributions to a 529 plan are treated as gifts by the contributor to the account’s designated beneficiary. With the higher exemption, high-net-worth families can gift/fund 529 accounts much more without incurring a gift tax.
- Five-year gift election: 529 plans allow an accelerated gifting option: a single contributor can donate up to $95,000 at once per beneficiary (using a 5-year averaging rule of the $19,000 annual exclusion). Thanks to the $15M exemption, even contributions reaching the hundreds of thousands (or millions) become possible and tax-free. Many 529 plans have account limits of $500,000 or more, so this rule allows families to fully fund those accounts quickly.
ABLE Accounts and 529 Rollovers
- Permanent ABLE rollover: The law makes permanent the rule that allows transfers from a 529 to an ABLE account (a special savings account for individuals with disabilities). Each year, up to the ABLE contribution limit (currently $19,000) can be moved tax-free from a 529 to an ABLE account for the same beneficiary.
- What ABLE accounts do: ABLE accounts (under IRC §529A) grow tax-deferred and can be spent tax-free for qualified expenses, without the disabled individual losing public benefits. Qualified expenses include education, housing, transportation, healthcare, job training, medical, legal, and financial advisory expenses, and personal support services.
- Eligibility: To open an ABLE account, the individual must have had a significant disability onset before age 26 (that age limit rises to 46 in 2026) and meet certain benefit or certification requirements.
Changes to Federal Student Loan Programs
- Lower loan caps: Federal student loan limits are being tightened. For example, graduate student borrowing is capped at $100,000 (down from $138,000), professional school borrowing at $200,000, and undergraduate borrowing remains at $57,500.
- PLUS loans limited: Parent PLUS loans (for undergraduate parents) are capped at $20,000 per year (with a $65,000 lifetime limit per child, starting July 1, 2026). Graduate PLUS loans will be discontinued after 2025.
- Fewer repayment plans: After July 1, 2026, federal student loans will have just two repayment options: the standard fixed payment plan (10–25 year term) or the new “Repayment Assistance Plan” income-based plan (payments 1–10% of income). This eliminates many of the income-driven and forgiveness plans that were available before.
- Pell Grant limits: Students whose family income, as measured by the Student Aid Index (formerly the Expected Family Contribution), is too high (double the maximum Pell Grant index) will no longer qualify for Pell Grants.
- Effect on planning: In summary, loans will be harder to get and less flexible, making it riskier to borrow for college. This increases the importance of personal means to finance education, notably 529 accounts, as a way to pay for education costs upfront.
Planning Considerations and Strategies
Contribute more to 529 accounts
With these expanded uses, 529 accounts are even more attractive. Families may want to invest more money in a 529 account, knowing it can cover a wider range of future education costs (from preschool through graduate training or certification).
Tax-free compounding over many years can significantly boost savings. The fear of the funds “being trapped” in the 529 account if not to be used for traditional college expenses is further diminished.
Capitalize on the higher K–12 limit
Starting in 2026, parents can use their 529 accounts to pay up to $20,000 per year per child for K–12 tuition and related expenses. If private or specialized schooling is possible, allocating more to 529 accounts may make sense. The longer contributions stay invested in a 529, the more they can grow tax-free before those K–12 years arrive.
Another consideration is maintaining the 529 account (no 529 RMDs) for the next generation’s K-12 expenses, allowing even more tax-deferred earnings to pay such expenses.
Reevaluate alternative education savings
Traditional alternatives have lost ground with the 2025 Tax Act enhancements to 529. Prepaid tuition plans (which lock in future college tuition at today’s rates) now offer less flexibility compared to 529s that can cover more expenses for a much wider array of education expenses.
Financial advisors can structure a 529 account with lower-risk investments (for the risk-averse who have favored prepaid plans) that may still outperform the actual rate of return of prepaid tuition plans. Coverdell ESAs (a type of education savings account) used to be comparatively attractive for K–12 costs and had more investment options, but they have strict income limits and only $2,000 per year contributions.
529 plans always had no income cap, high contribution limits, and now with broader K-12 qualified expenses, they generally outweigh the benefits of Coverdell accounts. Existing Coverdell accounts can be rolled into 529 plans tax-free to take advantage of these improvements.
Incorporate 529 accounts into planning for families with disabled members
By removing the sunset on rolling over 529-to-ABLE accounts, the 2025 Tax Act creates the long-term planning opportunity to use 529 plans, which are far more flexible and versatile than ABLE plans, to invest and grow one’s savings for any family member, including the disabled family member.
The 529 account can be used to fund the annual ABLE account contribution and expend such funds (principal and earnings) tax-free for a variety of ABLE qualified expenses. Additional amounts may be withdrawn from the 529 account penalty-free when the disabled family member is listed on the 529 account as its designated beneficiary. Discussions should include naming a special needs trust as the 529 account’s successor owner.
Plan for excess 529 funds
If a 529 account has leftover money after all education costs are covered for a particular designated beneficiary, the account owner has a number of options for how to use these funds. Current law allows transferring up to $35,000 (lifetime total) into the beneficiary’s Roth IRA (subject to annual IRA contribution limits), providing tax-free retirement savings.
Alternatively, the account owner can change the beneficiary to another family member for future education funding, possibly for multiple generations. Thoughtful planning can ensure that such funds are applied with the greatest tax efficiency.
It is also important to keep in mind that Non-Qualified Withdrawals from a 529 account only result in taxes on the earnings (not unlike a non-deductible traditional IRA) and an additional tax penalty of 10% of such earnings, unless waived in the case of death, disability, or scholarship of the designated beneficiary. In every instance of 529 account growth and upon withdrawal, the 3.8% net investment income tax is not applicable.
Compare 529s vs. future Trump Accounts
The new child IRA (“Trump”) accounts sound good on paper, but advisors note their downsides. They cannot be accessed until age 18 and have only one investment option.
In contrast, a 529 account is owned by the contributor (often a parent or grandparent), who can change beneficiaries or withdraw funds (with or without penalties) if the account owner’s plans change.
Most states also offer income tax deductions or credits for 529 plan contributions, which do not apply to the Trump accounts. Additionally, unused 529 funds can later roll into the beneficiary’s Roth IRA for retirement savings, which can be used in retirement tax-free, as opposed to taxes on Trump/traditional IRAs in retirement.
Because of their flexibility, most families will find it makes sense to prioritize funding 529 plans before contributing to the new children’s retirement accounts.
Utilize the $15M gift tax exemption
Because 529 contributions are treated as gifts to the 529 account designated beneficiary, the expanded lifetime gift/estate exclusion is a big opportunity. Financial advisors frequently suggest using the 5-year gift election, which lets one person contribute up to $95,000 at once per child (or $190,000 from a married couple) into a 529 without exceeding the annual gift tax limit.
With a $15M exemption, much larger contributions are protected from any gift tax considerations, allowing 529 accounts to be funded at once up to their maximum contribution levels, which frequently exceed $500,000 per account. Given that the 529 account owner maintains daily access, liquidity, and control outside their taxable estate, there is little reason to hesitate to fund these accounts aggressively.
Further, about a dozen states (including MA, NY, OR) with their own estate tax applicable at a much lower rate than the federal threshold for which incorporating 529 into estate planning can make enormous sense.
Incorporating a trust as a successor owner should also be considered. It would be important to provide intent and direction on how large balance 529 accounts are to be handled following the passing of the individual 529 account owner. Further, the tax advantages of the 529 account are compelling when compared to the onerous tax rates trusts must endure.
Conclusion
The 2025 Tax Act significantly enhances 529 plans, making them more versatile for a wider range of educational and career purposes and other wealth management goals. Families and advisors should take stock of these changes: increase contributions to capture the new benefits, consider use of 529s for qualified K–12 and vocational expenses, reexamine older savings vehicles, and leverage tax rules (like the higher lifetime gift tax exemption) to maximize the investment growth of one’s savings. By adjusting strategies now, investors can unlock the full potential of 529 plans under the 2025 Tax Act.
