The One Big Beautiful Bill Act, known as OBBBA, has far-reaching effects on financial planning, most notably on retirement. One area that doesn’t get as much attention is the bill’s effects on education planning.
Currently, there are three primary ways to fund education on a tax-preferred basis. They include:
1. 529 plans
These are tax-advantaged plans that allow you to save primarily for college education, but they can also be used to fund private primary school (K-12). These state-sponsored plans allow contributions to be tax-deductible for state taxes (in many states). These plans allow earnings to grow tax-deferred and future withdrawals to be tax-free when used for qualified education expenses. OBBBA’s effect on 529 plans is significant. It now allows for additional expenses to be considered “qualified,” including standardized test fees, books, dual enrollment fees, tutoring, online educational materials, and educational therapy for students with disabilities. It also increased the annual limit for K-12 expenses from $10,000 to $20,000. 529 can now be used to pay for postsecondary credentialing programs, including professional licenses, continuing education classes, and certificate programs such as apprenticeships.
2. ESA Coverdell accounts
These plans function similarly to 529 accounts but have much lower contribution limits. These plans are not tax-deductible for federal or state taxes, but do grow tax-deferred, and withdrawals can be tax-free for qualified expenses. Qualified expenses include college tuition, room & board, books, and supplies. ESA plans were not affected by OBBBA.
3. IRAs
While IRAs aren’t meant to be used for college, the IRS created an exception to the 10% penalty if the withdrawal is used for college expenses. Qualified expenses for IRAs include tuition, books, fees, computers, and any required equipment. Room and board can also be included, but a student must be at least half-time, meaning if they take one or two classes, the expense will not be considered qualified, and the 10% penalty will apply. This exception is only for IRAs, and not company retirement plans. Unlike 529 plans and ESAs, taxes must still be paid on distributions from IRAs used for college expenses; only the additional 10% penalty is waived. Expenses can only be considered qualified if they are for yourself, your spouse, and your children or grandchildren. No other recipients would be considered towards making a qualified distribution. OBBBA did not make any changes to these rules.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS, visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
