Recent Changes from the One Big Beautiful Bill Act (OBBB)

Signed into law by President Trump on July 4, 2025, the OBBB introduces significant enhancements to 529 plans effective for tax year 2026. These include increasing the annual federal tax-free withdrawal limit for K–12 qualified education expenses from $10,000 to $20,000 per beneficiary. It also expands qualified K–12 expenses to include books, tutoring, standardized testing fees (e.g., SAT, ACT), online learning materials, educational therapies for children with disabilities, dual enrollment fees, workforce credential programs, and continuing education courses.

Note: As this bill is recent, California has not yet conformed to these federal changes. Check with a tax professional for the latest on state tax treatment.

What Is a 529 Plan?

A 529 plan is a tax-advantaged account that helps families save for educational expenses. While primarily used for college and higher education, starting in tax year 2026, you can also use up to $20,000 per year per student for K–12 qualified education expenses, including tuition at private, public, or religious schools, books, tutoring, standardized testing fees, and more—federally tax-free.

Why Consider a 529 Plan?

• Tax Advantages (Federal): Earnings grow tax-free and remain tax-free when used for qualified expenses.
• Flexibility: You can open a 529 plan sponsored by any state, regardless of where you live.
• Broad Coverage: Qualified expenses include K–12 education costs (up to $20,000/year starting 2026, including tuition, books, tutoring, etc.) and a wide range of post-secondary education costs.

California Considerations

California does not offer state tax deductions or credits for 529 contributions. It also does not conform to the federal treatment of K–12 withdrawals, meaning earnings used for K–12 expenses can be subject to California state taxes and an additional 2.5% tax. Nonetheless, many Californians still benefit from the federal tax savings on 529 earnings. With the recent OBBB expansions, monitor for potential state conformity updates.

How to Set Up a 529 Plan

1. Research Providers: Look for low fees, strong investment options, and good customer service. Popular choices include Vanguard, Fidelity, and T. Rowe Price.
2. Open the Account: Provide basic personal and beneficiary details, along with banking information for deposits. Most plans allow online sign-up.
3. Fund the Plan: Make an initial contribution and consider automatic recurring contributions to build savings consistently.
4. Choose Investments: Many 529s offer age-based or static investment portfolios. Align your choice with your risk tolerance and your child’s anticipated education timeline.
5. Monitor & Adjust: Review your account periodically. You can adjust contributions and sometimes rebalance the portfolio (within IRS limits on changes).

Using 529 Funds for K–12 Expenses

Starting in tax year 2026, federal law allows up to $20,000 per beneficiary per year in 529 funds to be used for qualified K–12 expenses without federal tax on earnings. Qualified expenses now include tuition, books, tutoring, standardized testing fees, online materials, educational therapies, and more. To pay a school or for other expenses, you can:

• Request a Direct Payment: Many 529 plans let you send funds directly to the school or provider on the student’s behalf.
• Reimburse Yourself: Withdraw funds to your bank account and pay the expenses, keeping receipts and records for accuracy.

Remember, California may still tax any earnings portion of these K–12 withdrawals, as it does not currently conform to federal rules.

Further Reading & Tools

• SavingforCollege.com – Plan comparisons, rankings, and detailed FAQs on 529 savings.
• IRS Publication 970 – Official tax rules for 529 plans and other education benefits.
• College Savings Plans Network – General information and updates on state plans nationwide.