Potential Expansion of Tax Benefits for 529 College-Savings Plans

Written by David Newman, JD LMC Tax & Legal Manager

President Trump’s tax package, the One Big Beautiful Bill Act, passed the House of Representatives in May and could significantly broaden how families use their 529 college savings plans if enacted into law. Traditionally reserved for higher education costs, 529 funds may soon be eligible for a wider range of educational expenses, including K–12 costs and non-degree credentials. The bill is now under Senate review, but these provisions have, so far, attracted little opposition.

How 529 Plans Work Today

529 plans are tax-advantaged accounts designed to help families save for education. Contributions are made with after-tax dollars and are not deductible at the federal level, though some states offer tax incentives. As an example, contributions of up to $10,000 are deductible annually from New York State taxable income for married couples filing jointly; single taxpayers in New York can deduct up to $5,000 annually. In addition, investment growth within the account is tax-free, and withdrawals are also tax-free when used for qualified education expenses.

Currently, qualified expenses include tuition, fees, and other college-related costs. Approximately 17 million 529 accounts are active across the U.S., holding about $500 billion in total assets.

Proposed Changes at a Glance

If enacted, the bill would significantly expand the list of qualified expenses for tax-free withdrawals.

Expanded K–12 Uses

While 529 funds can already be used for private-school tuition, the new bill would allow tax-free withdrawals for:

• Curriculum and instructional materials
• Digital or physical textbooks
• Tutoring classes
• Dual-enrollment fees for early college credit
• Educational therapies for students with disabilities
• SAT, ACT, and related test preparation

These changes would apply to students in public, private, religious, or home school environments.

It’s worth noting that some states—including New York, California, Illinois, and Minnesota—currently penalize 529 withdrawals for K–12 tuition by reclaiming state tax deductions. Whether these states will align with the new federal rules remains to be seen.

Coverage for Non-Degree Credentials

Another major change would allow tax-free 529 withdrawals for career training and certification programs outside traditional college paths. This includes:

• Skilled trades training (e.g., HVAC, aviation maintenance)
• Professional licensing programs (e.g., for electricians, EMTs, cosmetologists)
• Continuing education required for professional credentials

To qualify, the program must lead to a recognized license or credential after high school. The bill references lists of career training and certification programs that are maintained by the U.S. Department of Labor and the Department of Veterans Affairs, while also opening the door to additional approved programs.

Strategic Planning Considerations

If passed, the expanded uses of 529 plans would take effect immediately on the federal level. It remains to be seen if all states will choose to adopt these changes.

While 529 funds grow tax-free, the benefits of compounding increase with time. Using funds for earlier expenses, like K–12 tuition or tutoring, may reduce long-term growth potential. However, the added flexibility could be useful in several scenarios:

• Families with overfunded accounts due to scholarships or other changes
• Parents unsure whether their children will attend traditional colleges
• Strategic use of funds to support scholarship readiness through test prep

In states like Virginia, only a small percentage of withdrawals currently go toward K–12 expenses, suggesting that most savers still prioritize college funding. However, these changes could allow for a more strategic use of account funds.

The Importance of Planning with LMC

The proposed updates to 529 plans would offer families more flexible and inclusive ways to save for education. By extending tax-free withdrawals to cover K–12 costs and non-degree training, the changes better align with diverse educational paths and workforce demands.

With tailored advice on tax-saving strategies, LMC provides the expert guidance you need to optimize your long-term financial goals. LMC is dedicated to staying updated on these developments and advising clients effectively. For more information or questions you might have on taking advantage of a 529 plan, please reach out to your LMC professional.