By Laura Saunders

College-savings accounts currently hold about $500 billion, and savers may soon be able to use these funds for much more than college.

Little-noticed provisions in the massive tax-and-spending bill that the House of Representatives passed in May would greatly expand tax-free withdrawals from 529 accounts, as the popular plans are called. The bill is now before the Senate, which could alter the provisions. So far they haven't garnered much controversy, however.

Under existing law, savers make contributions to individual 529 accounts. These dollars don't get a federal tax deduction, and they may or may not get a state tax deduction. But once dollars are in the account, they can be invested and grow free of federal and state taxes.

Account owners can take tax-free 529 withdrawals at a later time to pay eligible education expenses for account beneficiaries, typically for college tuition and related costs. Recently, there were about 17 million individual 529 accounts, according to Paul Curley, who tracks industry data at ISS Market Intelligence.

If the provisions in the House bill become law, expenses eligible for tax-free withdrawals from 529 plans would expand to include many costs for students in K-12 elementary and high schools. Tax-free withdrawals could also be used to pay for a range of nondegree credentials and licenses, such as training to become an aviation-maintenance technician.

Promoting alternatives

The proposed changes are in line with the Trump administration's goal of promoting alternatives to traditional college degrees, and they have bipartisan support in Congress. A group of 529 plans, which are typically run by individual states, have pushed for the expansion for several years.

"There are many high-demand, well-paying careers that require postsecondary education but not a four-year degree. It's all about finding the right mix for everyone," says Mary Morris, chief executive of Commonwealth Savers Plan. The plan, which sponsors Virginia's 529 accounts and is the largest in the nation, recently held about $100 billion.

To be sure, there's already a provision in the law allowing savers to withdraw 529 funds tax-free for K-12 private-school tuition. However, 529 owners generally save their account dollars for college costs. In Commonwealth Savers' Invest529 plan, for example, withdrawals for K-12 tuition are only about 6% of total withdrawals.

In addition, more than 10 states -- including New York, California, Illinois and Minnesota -- penalize such payouts. They do so by taking back state-tax deductions if 529 funds are used to pay K-12 tuition, according to Mark Kantrowitz, a college-savings specialist.

The provisions in the House bill would expand tax-free withdrawals for expenses far beyond K-12 tuition, and they would apply to students at private, public, religious and home schools.

New coverage

Newly covered would be the cost of curriculum materials; books and other physical or digital instructional materials; tuition for tutoring or classes outside the home; fees for dual enrollment in early college programs; educational therapies for students with disabilities; and testing fees, such as for SATs and ACTs. Even the cost of SAT or ACT test prep might be eligible, says Morris.

For credentials and licenses, the provisions would make a range of noncollege programs eligible for tax-free 529 withdrawals -- including continuing professional education required for attorneys, electricians, cosmetologists and others.

"The economy is suffering from a shortage of skilled tradespeople, and federal education incentives and grants shouldn't steer students toward four-year degrees and a lifetime of student debt," says Sean Robertson, a spokesman for the Air Conditioning Contractors of America, which strongly supports the proposed changes.

Under existing law, credential programs such as EMT training or heating and air conditioning tech certificates are eligible for tax-free 529 withdrawals when offered through community colleges or other eligible institutions. If not, they don't qualify.

To be eligible for tax-free withdrawals from 529 plans, a program would have to lead to a recognized post-high school license or credential. The proposed provisions cite lists of programs now approved by the secretary of labor and Department of Veterans Affairs, and they open the door to other ways of getting certified as well.

What to do

If the provisions in the House bill are enacted as proposed, they would take effect immediately. Savers who want to use them should check their 529 plans and state law to find out whether they will automatically incorporate the changes or will require other action, perhaps by the state legislature.

Also assess the benefits. While 529 contributions don't receive an upfront federal tax deduction, assets do grow tax-free. But compounding takes time. So with K-12 expenses, in particular, there's less time to let account funds build than for college savings.

On the other hand, the broader menu for tax-free withdrawals could help 529 owners dealing with overfunded accounts, say because a child got a college scholarship. It could also reassure parents and grandparents who want to save but don't know whether college will ultimately make sense for their children or grandchildren.

Morris notes that in the Virginia plans, which are used by many savers outside the state, most people who have withdrawn 529 funds for K-12 expenses haven't drained their accounts. So the expansion could also be a way for some savers to make strategic withdrawals ahead of college, say by using some account funds to pay for test prep that position the student for college scholarships.

The bottom line: The proposed changes to 529 rules would provide education savers with new and useful flexibility. But, as with other tax-favored savings accounts, investors should look before they leap.

Write to Laura Saunders at Laura.Saunders@wsj.com

(END) Dow Jones Newswires

June 13, 2025 05:30 ET (09:30 GMT)

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