2025 Tax Proposal | 529 Education Savings Accounts
529s offer tax-deductible contributions, tax-free growth, and tax-free education-related withdrawals. This empowers families to invest in their children’s futures.
In May 2025, Congress introduced a significant tax reform bill, that included provisions aimed at expanding financial tools such as 529 savings plans. This legislation would expand 529 flexibility by expanding the definition of qualified expenses to include K-12 and homeschooling expenses, and potentially allowing funds to be used for professional designations. These expanded definitions of qualified expenses will make 529 savings plans an even more attractive savings tool.
Background | Understanding 529 Education Savings Plans
A 529 savings plan is a tax-advantaged investment vehicle designed to encourage families to save for future education expenses. Authorized under Section 529 of the Internal Revenue Code, these plans are sponsored by states, state agencies, or educational institutions. They offer a flexible and accessible way to build savings for education while providing significant tax benefits. Contributions to a 529 plan grow tax-deferred, and withdrawals for qualified education expenses are exempt from federal income tax, with many states also offering additional tax deductions or credits for contributions.
The primary appeal of 529 plans lies in their versatility. They can be used to cover a wide range of education-related costs, including tuition, fees, books, supplies, and, in some cases, room and board. With rising education costs—college tuition has increased by over 180% since 1980, according to the U.S. Department of Education—529 plans provide a structured way for families to prepare financially for their children’s educational journeys. Moreover, anyone can contribute to a 529 plan, making it a popular option for parents, grandparents, and other relatives.
Evolution | Broadening the Scope of 529 Benefits
The passage of the SECURE Act 2.0 on December 29, 2022, marked a significant milestone in the evolution of 529 plans. This legislation introduced several changes that expanded the flexibility and utility of these accounts, addressing longstanding concerns about unused funds and the scope of qualified expenses.
One of the most notable changes is the provision allowing tax-free rollovers of unused 529 plan funds to a Roth IRA for the beneficiary, subject to a lifetime cap of $35,000. This addresses a common issue: what happens to 529 funds if the beneficiary does not pursue higher education or receives scholarships that cover their expenses? The rollover option provides a safety net, enabling families to redirect savings toward retirement without incurring tax penalties.
Additionally, SECURE Act 2.0 broadened the definition of qualified expenses. Previously, 529 plans were primarily used for postsecondary education costs. The Act extended permissible uses to include up to $10,000 per year for K-12 tuition at private, public, or religious schools. It also added apprenticeship programs registered with the U.S. Department of Labor as qualifying expenses, reflecting a growing recognition of vocational and technical training as valid educational pathways.
Proposed Enhancements | The May 2025 Tax Proposal
In May 2025, newly drafted tax legislation proposed further enhancements to 529 plans, signaling a continued shift toward supporting diverse educational needs and career development pathways. These proposals aim to make 529 plans even more inclusive and adaptable to modern education trends, such as homeschooling, online learning, and non-traditional postsecondary programs.
Key provisions of the proposed legislation include:
Expansion of Covered K–12 Expenses: Beyond the existing $10,000 annual limit for K-12 tuition, the proposal would allow 529 funds to cover additional costs, such as curriculum materials, books, online education resources, tutoring services, and standardized test fees (e.g., SAT, ACT, or AP exams). This change acknowledges the diverse expenses associated with K-12 education, particularly in private or specialized programs.
Support for Homeschooling: The legislation would explicitly permit 529 funds to be used for homeschooling expenses, including educational software, online courses, and fees for dual enrollment programs that allow high school students to earn college credits. This reflects the growing popularity of homeschooling, with over 3 million students homeschooled in the U.S. as of recent estimates.
Support for Educational Therapies: For students with disabilities, the proposal would allow 529 funds to cover expenses for educational therapies and related services, such as speech therapy or specialized tutoring. This provision aligns with federal laws like the Individuals with Disabilities Education Act (IDEA) and ensures that 529 plans can support equitable access to education.
Coverage of Postsecondary Credentialing Programs: The legislation would expand qualified expenses to include tuition and materials for certificate programs, trade schools, and other credentialing programs recognized under federal law. With nearly 40% of U.S. workers holding non-degree credentials, according to the U.S. Bureau of Labor Statistics, this change recognizes the value of alternative pathways to career readiness.
These proposed changes aim to make 529 plans a more comprehensive tool for addressing the full spectrum of educational expenses, from early childhood through workforce preparation.
Summary
The proposed tax legislation represents a significant step toward enhancing the flexibility and inclusivity of 529 education savings plans. By expanding the range of qualified expenses and supporting diverse educational pathways, these changes could empower more families to invest in their children’s futures with confidence. As the legislation progresses through the Senate, its prospects appear promising, though stakeholders should stay informed about potential amendments or adjustments.
Check back for updates on the legislation’s progress and its impact on 529 plan flexibility.
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ABOUT THE AUTHOR
Liz Darling is a Senior Client Advisor and founding member of LEVATUS Wealth Services. Her professional background includes institutional real estate investment management, wealth planning and hospitality management. Coming from an institutional background, Liz’s favorite part of her day is interacting with her clients on the little things that she can do to make their lives and their financial situation simpler and clearer. Liz taps into her years of experience to write on topic such as, the role of real estate in generational wealth building, the power of straightforward strategy and planning, and how best to address the many ways wealth can impact children.
