Trump tax law brings some big changes to 529 plans

Yahoo

03-07-2025

529 education savings plans are getting a major upgrade under President Trump's massive tax bill, particularly for parents looking to stash away cash for K-12 expenses.
First, a quick overview: 529 plans allow anyone — not just parents — to set aside money in an investment account for certain education expenses. Earnings aren't subject to federal taxes, and withdrawals are similarly tax-free if the money is spent on a qualified category.
The savings plans are typically thought of as being for college students, but they benefit young children too. Right now, due to changes first made in Trump's 2017 tax bill, parents can withdraw up to $10,000 each year to pay for K-12 tuition costs. The new legislation bumps up that benefit even more, allowing up to $20,000 in annual withdrawals while widening the definition of 'qualified expenses' in K-12 to include non-tuition categories like books, tutoring, standardized testing fees, educational therapies for children with disabilities, and more.
Certain professional credential fees will also now be covered as qualified expenses. For example, Andy Whitehair, a director with the advisory, tax, and assurance firm Baaker Tilly, noted that CPAs like him could tap 529 funds to cover things like exams and licensing costs. That means 529 plans are now much more than just a college savings vehicle.
'You're expanding the eligible expenses that you can pay out of this, so I think that just inherently is going to make them more useful,' Whitehair said.
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Elyse Germack, an attorney and CPA who does tax and estate planning in Birmingham, Mich., agreed that the wider perks will help parents pay for K-12 costs.
'Many families are interested in having greater options for use of funds, especially when it comes to K-12, and having the ability to pay for private school along with public school-type expenses would be very helpful,' Germack said.
Still, the upgrades will only reach those who are both aware of the plans and have the ability to contribute to them, meaning lower-income families will likely be left out.
Patricia McCoy, a professor at Boston College Law School, wrote in a recent Substack post that 529 plans "primarily are used as tax shelters by the top 10 percent." Many families don't have 529 plans, McCoy wrote, and those that do are typically in higher tax brackets. Lower-income families, McCoy said, would benefit more from Pell Grant funding.
Then there's Trump accounts, a new tax-advantaged investment vehicle for children that has to be established before they turn 18 and can't be tapped until after they turn 18.
'It's basically a kid IRA,' Whitehair said.
He explained: 'Funds would grow tax-deferred; when you take them out they would be taxable to the extent of income that you've earned; if you're waiting until you're age 59 and a half — normal retirement age — you can take out without penalty; if you're taking it out before then it would need to be for certain qualified expenses like under the IRA rules.'
Those qualified expenses include college expenses and first-time home-buying costs up to $10,000, Whitehair said. There's a $5,000-a-year contribution limit, but the government will contribute $1,000 to the Trump accounts as part of a pilot program for children born between Dec. 31, 2024, and Jan. 1, 2029.
Still, 529s remain optimal for those looking to save for education expenses.
'A 529 plan is still going to be the gold standard,' Whitehair said. 'If your sole goal is to save for education, any of the funds that come out of the 529 plan — all the income that you've earned — if you're using it for qualified education expenses, it's going to come out tax-free.'
Emma Ockerman is a senior reporter for Yahoo Finance covering economic and labor issues in personal finance.
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