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President Donald Trump’s mega-tax bill expands the use of the 529 education savings plan, but could result in a pause for some investors, some experts say.
The law, dubbed “One Big Beautiful Bill Act,” by Trump, who signed the law over the weekend, greatly expands options for how to use the 529 plan after being largely limited to eligible higher education costs and contributions up to $10,000 a year for K-12 tuition fees. It can now be used for a variety of costs, from standardized test fees to educational therapy and workforce training and qualifications.
The state-run tax-benefit 529 allows for increased tax-free and tax-free withdrawals when used for qualified education expenses. Unused money can be caught up in a Ross IRA, transferred to related beneficiaries, or used to repay student loans under certain conditions.
However, the restrictions still in place may not always be worth the 529 for big savers, some experts say.
Since she was a baby, Richard Pont has the regrets of the buyer after contributing annually to his nearly seven-year-old nie’s 529 educational savings plan.
“The income from the 529 plan is tax deferred and tax-free if used for qualifying educational purposes, but (at the time) I am not limited to a small pool of investment options, so if I invest my gift in the tax account, my nie would be better.”
The limited investment options are nothing more than negative investments in the 529 plan, he said. Others include various state rules, strict restrictions remaining on how money costs are spent, and the possibility that someone may not know when they open a 529 for you.
How will one big beautiful bill act affect 529?
OBBB allows tax-free withdrawals of up to $20,000 a year for K-12 curriculum, books, online resources, personalized tuition and educational therapy for students with disabilities. Dual registration fees for university courses and withdrawal of materials from standardized test fees, tuition fees, certificate programs, trade schools, and other qualification programs recognized under federal law are also tax-exempt.
This means that K-12 tuition fees alone, $10,000 a year, a lifetime student loan limit of $10,000, and a significantly higher cost of qualifying at a trade school or vocational school or registered apprentice program.
Under either situation, up to $35,000 of unused funds can be involved in a Roth IRA under certain conditions. Alternatively, the beneficiary can be changed to another relative.
How does the 529 plan increase your savings?
After tax money will be added to the state 529 plan. Money can be placed in one of a variety of portfolios that hold combinations of mutual funds that can potentially help your money grow faster.
Money increases tax-free, while eligible withdrawals are tax-free. Additionally, some states offer tax deductions or credits on savings.
However, most portfolios are limited to mutual funds and consist of age-based target funds.
“Most 529 plans do not offer sector-specific mutual funds, such as the high-tech sector. I don’t think the plans allow individual share purchases,” Pong said.
Is 529 worth it?
If this is not the only savings vehicle you use, it’s a good way to save money on education, according to Lori Gross, a financial and investment advisor at Outlook Financial Center in Troy, Ohio.
“We don’t discourage other families like uncles from opening a 529 for their children. Or, you’re in high school and want to throw away some money for yourself, but don’t put in a lot of money,” Gross said. One reason is that 529 counts as assets as a free federal student aid (FAFSA) application, reducing student aid, she said.
Federal tax laws do not allow tax deductions on 529 contributions, but in some states. They are all different and can be confusing, and require a lot of research to determine the best choice. Some states only allow tax deductions or credits for residents, while others suppress annual or lifetime deductions. Tax credits reduce your taxes in dollars, but tax credits reduce your taxable income.
“For many taxpayers, I’m sure the state tax incentives are the reason they are (contributed to 529),” Pong said.
Still, some say the expansion under the OBB makes the 529 attractive to a wider range of people.
“One big beautiful bill” officially transformed 529 from a college savings account to K-Career-Retirement Powerhouse,” said Jamie Dunn, a certified financial planner at Prudential Advisors, on a social media post, focusing on the benefits of rolling unused funds from kindergarten to Roth Ira.
According to the nonprofit Independent Women’s Forum, not only tuition fees but K-12 course materials also benefit homeschool families.
“The 529 expansion retains the potential for change and provides financial and educational flexibility for homeschool families,” the organization said in a statement. “The bill will allow one tax-free withdrawal at a time to make their education dreams even more accomplished.”
What are the drawbacks of the 529 plan?
- limited Investment optionscan reduce revenue growth.
According to Saving for College, the University of Maryland’s top-ranked investment plan showed an average 10-year return rate of 7.04% as of March 31. This is below the average for the broad S&P 500 index from 10% to 12%.
Pon invested $10,000 invested in the 529 plan with a traditional securities trading account and 10% annual returns with a 15% return, with no profits in California until its 18th year.
Even after paying the federal long-term capital gains tax, a 3.8% net investment income tax and a 9.3% California tax, he said “we can make more than 10% a year, which would be better.” He estimated the brokerage had earned nearly $36,200 over its tax-free 529 plan.
- Strict rules. The 529 plan is becoming more flexible, but some rules are limited, Pong said.
For example, beneficiaries can tap on non-university 529 plans, such as K-12 tuition fees, but the annual cap is currently $10,000, up from $20,000 in OBBB per beneficiary, rather than per 529 plans. Moreover, not all states consider these qualifying costs and do not tax them on withdrawals.
There is also a $10,000 lifetime cap that can be used to pay off student loans, Pon pointed out.
- 529 beneficiaries may not know that they are eligible. When Pong’s mother got sick, he opened her email and was shocked to see that she had begun a plan for 529 for her son she had never known. Furthermore, she had opened a 529 plan for his three cousins, so no funds were spent. Now they’re all graduating. “I think there are tens of thousands of planned accounts of 529 that people open and forget about, and are not used for college or other eligible expenses,” Pong said.
What is the alternative to the 529 plan?
- Traditional securities accounts It has unlimited investment options and can be used to harvest tax losses to reduce tax burdens. Money usage is not restricted. However, they count as assets and can reduce the financial aid package.
- Cash Value Life Insurance Contract Gross said more money could be donated because it remains in the parent’s name and not counted in financial aid. Plus, money is invested, guaranteed growth and can be used not only for schools but for anything. However, these are complex and can be high premium depending on the structure.
- Roth Iras It is not counted as an asset when calculating financial aid and contributions. However, distributions are considered non-access income for taxes, which can be counted in financial aid calculations. Annual contributions are kept at the upper limit, and contributions have income limits. Americans also need to make sure they have not reduced their retirement funds for themselves from Los Ira.
Not everyone is a savings plan and not all investors can beat the performance of stock indexes or target dates, Pong said. But “for experienced investors, it may be better not to plan for the 529.”
Medora Lee is a money, market and personal finance reporter for USA Today. mjlee@usatoday.com and Subscribe to our free daily money newsletter Personal finance tips and business news every Monday to Friday.
