How You Can Use A College 529 Plan – Updated for OBBBA – Now More than Just College Expenses

How You Can Use A College 529 Plan – Updated for OBBBA – Now More than Just College Expenses

By Raj Chokshi, CPA, MBA, CFP®

One day your child is born, and it feels like the next day he or she is heading off to college. I remember when my kids were born — I thought kids were expensive then! Now, with one child graduated and another one getting close to graduating from college, the expenses have mounted. Like most of our clients, we funded a 529 Plan to help defray college expenses. The 529 Plan allows tax-free growth if the funds are used for education. However, it’s important to know which expenses qualify.  The new One Big Beautiful Bill Act (“OBBBA”) has expanded those options and added new expenses for K-12 and higher education, including professional credentials.

Newly Expanded Qualified Expenses Under the OBBBA

• UPDATED – K-12 private school tuition and fees and homeschool expenses, increased from 10K/year to 20K/year per student
• UPDATED – Books and supplies, now include curriculum and curricular materials
• UPDATED – Computers and related equipment, now includes online educational materials
• NEW – Tutoring and educational therapy costs for students with disabilities, including occupational, behavioral, physical, and speech language therapies
• NEW – Standardized test fees: SAT, ACT, AP exams, and college admission exams
• NEW – Dual-enrollment college courses taken in high school
• NEW – Vocational and credentialing programs, including CPA exam prep and bar exam fees
• NEW – Continuing education and licensing renewal fees
• College Tuition and related fees
• Room and board
• Repayment of student loans – up to a maximum of $10,000
• NEW under Secure 2.0 Act – Rollover to Roth IRA of up to 35K lifetime, account has to be open for 15 years and the beneficiary has earned income

Some Details and Clarifications

These qualified expenses are adjusted by subtracting the amount you receive from Pell grants, tax free scholarships, and the lifetime learning credit. For example, if your tuition and fees are $15,000, and your student receives a $5,000 scholarship, you can only withdraw 10,000 tax-free dollars from your 529 Plan.

Of course, like all IRS rules, this one has exceptions and clarifications, and not all expenses qualify. Tuition and fees are required expenses and are allowed, but other expenses have limitations.

• The newly expanded qualified expenses must be incurred after the enactment of the bill, July 4, 2025
• Reimbursement of qualified expenses must occur in the same calendar year of the expense
• The actual amount charged for room and board, if you are living in school-provided housing
• The allowance for room and board included in the school’s cost of attendance for financial aid calculations, available on the school website
  • This rule makes sense; otherwise, wealthy parents would fund 529s to allow their kids to live in penthouses with butler services – all paid with tax-free dollars! These stipulations make how much you can withdraw less ambiguous.
• Textbooks count as a qualified expense, but only if the course requires them
• Computer equipment is qualified, but only if students use it during their matriculation at the school
• Software is also qualified, but not games

Non-Qualified Expenses

The IRS has also stated certain items that are clearly not qualified expenses:

• Insurance payments – home, health, etc.
• Sports expenses or monthly club dues
• Electronics and smartphones
• Room and board in excess of the school’s cost of attendance
• Transportation and travel expenses

To the extent possible, we always recommend you pay expenses directly to the educational institution from your 529 Plan versus reimbursing yourself. This method is much easier from a tax return standpoint. Of course, qualified expenses are allowed, but simply keep in mind you have to keep good records in the event of an audit. 

Pro Tip: Print the annual cost of attendance each year from your school’s website for documentation.  It will be updated each year and may not be available when needed later.

FAQs

Most people have a lot of questions about education plans. Here are some of our most frequently asked questions, along with some answers:

What if my child doesn’t go to College?

In that case, you can withdraw your principal (the amount of money you invested), tax free. The gains in the account are subject to taxes at regular tax rates and a 10% penalty.

Now you have the option to rollover leftover 529 Plan assets, up to 35K to the beneficiary.  The same earned income and annual limits apply as regular Roth IRA contributions.  We can help with the details.

What if my child gets a Scholarship?

Congratulations! In this case, you can take out the amount up to the scholarship without a penalty, but the taxes on the earnings would still apply.

What if I have money left over in the Plan?

In this situation, you can roll the assets over to another child, use it yourself if you are educationally inclined, or for other immediate family members. You have to change the plan beneficiary to use it for someone else.  As mentioned above, you can also roll some of the left over money into a Roth IRA for the beneficiary.

Do 529 plan contributions affect Student Loans and Aid?

Generally, 529 Plans have a minimal effect on either of these funding sources. 529 Plans are considered parental assets (kids are plan beneficiaries, not owners), so they are treated like any other parental asset, such as a brokerage/savings account.

What happens if I get tax credits for education on my tax return (American Opportunity Credit or Lifetime Learning Credit)?

You can’t double dip. In other words, you can’t use the 529 Plan for the same expenses that qualify you for the credits. Therefore, you want to be careful to maximize how you use the credit each year. However, most individuals making more than $80,000 (couples over $160,000) wouldn’t qualify for these credits anyway.

Another Pro Tip: Healthcare Advanced Directive

No one wants to think about the worst happening.  But, you will be glad that you did should something happen.  Now is a good time to review obtaining an health care advanced directive for your now adult child.  Here is another article where I discuss the details: Back to College Tips by Raj Chokshi

As always, we are here to answer questions, we are here to be an ear to talk things through, and most importantly we are here to help guide you for your long-term goals.  Please reach out with any questions.

Raj Chokshi, Partner and Wealth Manager

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.