Section 529 plans have been a core education savings tool since 1996. The basic structure hasn’t changed: contributions grow tax-deferred, and qualified distributions come out federal income tax-free. What has changed, thanks to the One, Big, Beautiful Bill Act (OBBBA) signed July 4, 2025, is the scope of what those plans can cover and who benefits from them.
Two distinct sets of changes are worth separating. The OBBBA expanded the definition of qualified expenses and raised the K-12 annual withdrawal limit. Separately, SECURE 2.0 (effective 2024) introduced the Roth IRA rollover provision, which remains unchanged. Both matter for a complete picture of how 529 plans work in 2026.
How 529 Plans Work
A 529 account is established under a state-sponsored plan. There is no federal deduction for contributions, but earnings grow tax-deferred and withdrawals for qualified expenses are federal income tax-free. Many states offer their own deductions or credits for contributions, though those rules vary by state and plan.
Account owners control the funds, direct the investments, and can change the beneficiary to another qualifying family member under Section 529(e)(2) without penalty. Non-qualified withdrawals trigger ordinary income tax plus a 10% federal penalty on the earnings portion.
There are no federal contribution limits on 529 accounts, though contributions are treated as completed gifts for gift and estate tax purposes, which affects how large contributions interact with annual exclusion limits and the five-year election.
What OBBBA Changed
K-12 Annual Limit Doubled
Before the OBBBA, annual withdrawals for K-12 tuition were capped at $10,000 per beneficiary. That limit doubled to $20,000 per beneficiary starting in tax year 2026.
The original $10,000 limit applied only to tuition at public, private, or religious K-12 schools. The new $20,000 limit covers a broader set of expenses, described below.
Expanded K-12 Qualified Expenses
For withdrawals taken after July 4, 2025, qualified K-12 expenses under IRC Section 529 now include more than tuition. The expanded definition covers:
- Curriculum materials, textbooks, workbooks, and digital learning tools
- Online educational materials
- Tutoring fees, provided the tutor is not related to the student, is licensed as a teacher by a state, has taught at an eligible institution, or is a subject matter expert
- Fees for standardized tests, AP exams, dual-enrollment programs, and college entrance exams including the SAT and ACT
- Educational therapies for students with disabilities from a licensed or accredited provider, including occupational, behavioral, physical, and speech-language therapy
The expanded expense definitions took effect at enactment on July 4, 2025. The higher $20,000 annual cap applies starting with tax year 2026 distributions.
Postsecondary Credentialing Expenses
Also effective July 4, 2025, 529 funds can be used tax-free for qualified postsecondary credentialing expenses. This covers programs that lead to professional licenses, certifications, technical credentials, and continuing education required to maintain existing credentials.
Covered costs include tuition, exam fees, books, supplies, and equipment for enrollment in recognized programs. Qualifying programs include those listed under state Workforce Innovation and Opportunity Act (WIOA) directories and the Veterans Benefits Administration’s Web Enabled Approval Management System (WEAMS). Apprenticeship programs registered with the Department of Labor also qualify.
This provision extends 529 coverage well beyond traditional degree programs, encompassing trade certifications, professional licensing paths, and CPE for licensed practitioners.
529-to-ABLE Rollovers Made Permanent
The provision allowing tax-free rollovers from 529 plans to Achieving a Better Life Experience (ABLE) accounts had been scheduled to expire December 31, 2025. The OBBBA made it permanent.
Rollovers are permitted to an ABLE account for the same beneficiary or a qualifying family member and are subject to the annual ABLE account contribution limit. Distributions from ABLE accounts for qualified disability expenses are tax-free.
Roth IRA Rollovers from 529 Plans
This provision was introduced by SECURE 2.0, not the OBBBA, and its terms are unchanged. Account holders can roll over unused 529 balances to a Roth IRA for the same beneficiary, subject to the following requirements under IRC Section 529(c)(3)(E):
- Lifetime limit: $35,000 per beneficiary
- Account age: The 529 account must have been open for at least 15 years
- Contribution age: Funds being rolled over must have been in the account for at least 5 years
- Same beneficiary: The 529 beneficiary and the Roth IRA owner must be the same person
- Annual limit: Rollovers are subject to the annual Roth IRA contribution limit for the year, reduced by any other Roth contributions made that year
The Roth IRA owner’s income does not affect eligibility for the rollover.
Gift and Estate Tax Treatment
Contributions to 529 accounts are treated as completed gifts of present interest from the contributor to the beneficiary at the time of contribution, per IRC Section 529(c)(2) and Section 2503(b).
Annual contributions qualify for the gift tax annual exclusion. For 2026, that exclusion is $19,000 per beneficiary ($38,000 for married couples electing gift splitting). Contributions within those amounts are also excluded for generation-skipping transfer tax purposes.
The Five-Year Election
A contributor can elect to treat a lump-sum contribution as if made ratably over five years. For 2026, this allows a single-year contribution of up to $95,000 per beneficiary ($190,000 for married couples electing gift splitting) without using any of the contributor’s lifetime exemption, provided no additional gifts are made to the same beneficiary during the five-year period.
The election is made on a timely filed Form 709. If the contributor dies during the five-year election period, the portion of the contribution allocated to the years after death is included in the contributor’s gross estate.
Estate Ownership vs. Gift Treatment
Despite the completed gift treatment for tax purposes, the account owner retains control over the funds, including investment direction, distribution decisions, and the ability to change the beneficiary. This is a structural feature of 529 plans under Section 529: assets pass out of the contributor’s estate while the contributor maintains control over how the funds are used.
Accounts are generally excluded from the owner’s gross estate. The exception is the estate inclusion rule that applies if the owner dies during an active five-year election period, as noted above.
Nonqualified Distributions
Withdrawals not used for qualified expenses are subject to federal income tax on the earnings portion, plus a 10% penalty. The penalty applies to earnings, not to the return of contributions (basis). Exceptions to the penalty exist for distributions made on account of the beneficiary’s death, disability, receipt of certain scholarships, and attendance at a U.S. Military Academy.
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