The One Big Beautiful Bill Act, known as OBBBA, has far-reaching effects on financial planning, most notably on retirement. One area that doesn’t get as much attention is the bill’s effects on education planning.
Currently, there are 3 primary ways to fund education on a tax-preferred basis. They include:
- 529 Plans. These are tax-advantaged plans that allow you to save primarily for college education, but they can also be used to fund private primary school (K-12). These state-sponsored plans allow contributions to be tax-deductible for state taxes (in many states). These plans allow earnings to grow tax-deferred and future withdrawals to be tax-free when used for qualified education expenses. OBBBA’s effect on 529 plans is significant. It now allows for additional expenses to be considered “qualified,” including standardized test fees, books, dual enrollment fees, tutoring, online educational materials, and educational therapy for disabled students. It also increased the annual limit for K-12 expenses from $10,000 to $20,000. 529 can now be used to pay for postsecondary credentialing programs, including professional licenses, continuing education classes, and certificate programs such as apprenticeships.
- ESA Coverdell Accounts. These plans function similarly to 529 accounts but have much lower contribution limits. These plans are not tax-deductible for federal or state taxes, but do grow tax-deferred, and withdrawals can be tax-free for qualified expenses. Qualified expenses include college tuition, room & board, books, and supplies. ESA plans were not affected by OBBBA.
- IRAs. While IRAs aren’t meant to be used for college, the IRS created an exception to the 10% penalty if the withdrawal is used for college expenses. Qualified expenses for IRAs include tuition, books, fees, computers, and any required equipment. Room and board can also be included, but a student must be at least half-time, meaning if they take 1 or 2 classes, the expense will not be considered qualified, and the 10% penalty will apply. This exception is only for IRAs, and not company retirement plans. Unlike 529 plans and ESAs, taxes must still be paid on distributions from IRAs used for college expenses; only the additional 10% penalty is waived. Expenses can only be considered qualified if they are for yourself, your spouse, and your children or grandchildren. No other people would be considered towards making a qualified distribution. OBBBA did not make any changes to these rules.
Frequently Asked Questions About the One Big Beautiful Bill Act (OBBA)
1. What is the One Big Beautiful Bill Act (OBBBA) and how does it impact education planning?
The One Big Beautiful Bill Act (OBBBA) introduced updates that affect several areas of financial planning, including education savings. One of the biggest impacts is expanding how certain accounts—especially 529 plans—can be used for a wider range of education-related expenses.
2. What are the main ways to save for education on a tax-advantaged basis?
There are three primary options and each has different rules, benefits, and limitations.:
- 529 Plans – Flexible, tax-advantaged accounts for education savings
- Coverdell ESAs – Similar to 529s but with lower contribution limits
- IRAs (in certain cases) – Can be used for education expenses without the 10% penalty, though taxes still apply
3. What changes did OBBBA make to 529 plans?
OBBBA significantly expanded 529 plan flexibility by:
- Increasing the K-12 annual expense limit from $10,000 to $20,000
- Adding new qualified expenses like:
- Standardized test fees
- Tutoring and online materials
- Dual enrollment costs
- Educational therapy
- Allowing funds to be used for postsecondary credentialing programs, including licenses, certifications, and apprenticeships