With the recent turnover and reduction in the federal government workforce, many federal employees may be considering changing jobs or professions. To do so, they will likely need additional training and licensing. Using tax-free withdrawals from a Section 529 plan is one way of minimizing the cost of this additional training and licensing.
Background on Section 529 Savings Plans
Internal Revenue Code (IRC) Section 529 savings plans were officially created as part of the Small Business Job Protection Act of 1996. This act established the federal framework for establishing qualified tuition programs (QTPs) that allow states to set up tax-advantaged accounts to help families save for higher education. Another type of 529 savings plan, the “College Savings Plan” could be established by states, individuals or mutual fund companies.
This column discusses the changes to IRC Section 529 plans starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 and ending with the passage of the One Big Beautiful Bill Act (OBBBA) in 2025.
Although contributions to IRC Section 529 plans have never been deductible for federal income tax purposes, a provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 allows the plans’ accrued earnings to be withdrawn federal income tax-free in order to pay for qualified higher education expenses. These qualified higher education expenses include tuition, fees, books, and room and board paid for attendance at a post-high school institution of higher education (colleges including community colleges and universities). This provision was originally set to sunset but was made permanent by Congress in 2006. Note that many states offer state income tax deductions or state tax credits for state residents who invest in their state’s Section 529 plans.
The Tax Cuts and Jobs Act of 2017 expanded the use of Section 529 plans to allow up to $10,000 per year per child to be withdrawn from a Section 529 plan in order to pay kindergarten through grade 12 private school and religious school tuition. SECURE Act (2019) allows Section 529 funds to be used for up to $10,000 (lifetime limit) toward student loan repayments. Another provision coming out of the SECURE Act allows expanded uses of Section 529 plans to include registered apprenticeship programs. A provision passed by Congress as part of SECURE Act 2.0 (2022) allows rollovers from Section 529 plans to Roth IRAs of up to $35,000 (per plan beneficiary) of unused Section 529 funds. This provision took effect January 1,2024 subject to certain limitations.
OBBBA Changes to Section 529 Plans
One provision passed as part of the One Big Beautiful Bill Act of 2025 (OBBBA) is that effective July 5, 2025, the types of qualified educational expenses that can be paid using tax-free Section 529 plan withdrawals for a child’s attendance at an elementary or a secondary school. These qualified expenses include tuition, curriculum materials, books or other instructional materials, online educational materials, and certain tutoring or educational classes outside the home. With respect to a tutor, the law is that the tutor may not be related to the Section 529 plan owner and must be a licensed teacher or expert. Qualified educational expenses also include testing fees, fees for dual enrollment in an institution of higher education, and certain education therapies for students with disabilities.
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Also included in OBBBA is a provision that effective January 1, 2026, Section 529 plan account owners can use tax-free withdrawals of up to $20,000 to pay kindergarten through grade 12 educational-related expenses, double the prior limit of $10,000. Section 529 account owners who want to make withdrawals for any of the expanded list of eligible kindergarten through grade 12 expenses (including testing and test preparation, SAT fees, special needs support, books and dual enrollment) are advised to check what their states allow for plan withdrawals not subject to state income tax. Some states do not conform to federal law and penalize state residents who make Section 529 plan withdrawals to pay any of the expanded list of educational expenses.
Section 529 plans tax-free withdrawals may now be made-tax-free to pay the cost of continuing education courses and testing review courses. Qualified costs include tuition, fees, books, supplies and equipment. Additionally, testing fees in order to obtain or maintain a recognized credential will qualify for tax-free withdrawals from a Section 529 plan. Examples include workforce training. Section 529 plan withdrawals can be made tax-free to pay for training and licensing in trades such as welding, electrical work and HVAC. It includes licensing costs and preparation fees for the Bar and CPA exams, plus paying the cost of continuing education to maintain professional licenses.
With the recent employee turnover in the federal government workforce, many federal employees may be considering changing jobs or professions. To do so, they will likely need additional training and licensing. Using tax-free withdrawals from a Section 529 plan is one way of minimizing the cost of this additional training and licensing.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019
