You Should Love The 529 Plan More After OBBBA Passed

As soon as both my children were born in 2017 and 2019, I superfunded their 529 plans equal to the five-year gift tax exemption. At the time, I was thrilled to do it given a parent’s number one responsibility is to provide for their children.

Finally, a tax-efficient way to shift some of my assets to two of the most important dependents in my life. My parents and my wife chipped in each year as well. Once the five-year contribution window reset, I kept going, contributing up to the annual gift tax limit.

By June 2024, I hit a wall. I had reached my goal of funding four years of full-priced private university tuition in a 529 plan—enough to ideally match or outpace college cost inflation. With that box checked, I suddenly felt adrift, like I had lost a key source of purpose. It was a mini parental existential crisis after fulfilling one of the biggest financial responsibilities we have.

Having children gave me renewed energy to earn and save post early retirement, which was something I genuinely enjoyed. It reinforced my ikigai, or reason for being. But after meeting those targets, I started wondering: What now?

Second-Guessing My 529 Plan Contributions

Once the 529 balances hit my target, I also began to question whether I had contributed too aggressively. Lately, I’ve had this recurring fear: imagine studying and paying 16 years’ worth of tuition, only to be replaced by AI. This situation is happening right now to thousands of college graduates, and I don’t want my children to add to the statistics.

Even with the mediocre returns of a target-date index fund, the market rebounds in 2023 and 2024 pushed the accounts higher than expected. And my son has 10 more years of compounding to go before he hits college. Will college really cost our family $750,000+ for four years when it’s his time?

In hindsight, I could have directed more of that capital into UGMA custodial accounts for greater flexibility. Alternatively, I could have invested more in my preferred private AI fund that holds the very names that could make finding a job difficult for my children.

Anthropic, for example, is reportedly raising up to $5 billion at a $170 billion valuation, up from a $63 billion valuation just earlier this year! Ah, I wish I had invested even more money in private AI companies.

Could Have Lived It Up More Today

Selfishly, I could’ve bought a Lambo and YOLOed more in mid-life as a degenerate poker player in Vegas. It’s been one of my dreams. We could’ve easily spent $50,000 on a sweet vacation rental in Honolulu for five weeks this summer—and done the same for many summers to come. Instead, I decided to save money and live with my parents.

Alternatively, we could have used his 529 plan money to grow our family’s passive income portfolio by an additional $20,000 a year to buy more time freedom today. With less money locked into a 529, we’d also feel less pressure for our son to attend college at all.

If you’re thinking about having children, are you truly prepared to sacrifice your time, money, and freedom for them? Raising kids isn’t cheap—especially if you want to help them go to college. Don’t let anyone tell you otherwise. Odds are, your child won’t get an athletic scholarship or be in the top 1% academically. That’s why the best thing you can do is save and invest aggressively on their behalf.

High Risk For Sending Our Kids To College In The Future

The thought of forking over ~$400,000 in today’s dollars for college, only for them to end up in a minimum wage job, makes me a little sick.

I still remember opening my neighborhood McDonald’s at 6 a.m. and getting chewed out by my power-tripping manager while flipping egg McMuffins. But I was just a high school student. To spend a fortune on college just to end up living at home and doing the same thing feels like too much of a letdown. You don’t need a degree to cook frozen meat patties.

Fortunately, the One Big Beautiful Bill Act (OBBBA) has made 529 plans more valuable going forward. Here’s what changed.

529 Plan Enhancements Under the OBBBA

I wrote about the OBBBA’s impact on FIRE seekers. Now let’s look at a more detailed look on the OBBBA’s impact for parents saving for their children’s education. If you’ve been worrying that you overfunded your children’s 529 plans, this post should help you feel a little better.

1. Broader List of Qualified Education Expenses

Section 70413 of the OBBBA expands what’s considered a “qualified education expense,” particularly for K–12 students. Here’s what’s now covered starting July 4, 2025:

• Tuition for public, private, or religious K–12 schools
• Curriculum and academic materials, including online courses
• Books and instructional supplies
• Tutoring services (if licensed and unrelated to the student)
• Standardized test fees (SAT, ACT, AP exams, etc.)
• Dual-enrollment college course fees
• Educational therapies for students with disabilities

Based on this expanded list of qualified education expenses, it sure seems like almost anything goes. And I’m not sure how the government can penalize you if it’s a gray area.

Example: If your 8th grader is struggling in math and you pay $150 per session for a certified tutor, those sessions can now be paid for using 529 funds. Same thing if you spend $1,000 on AI courses to help boost your child’s productivity.

Just note: federal tax-free status doesn’t always mean state tax-free. For example, California doesn’t conform to the federal definition of qualified expenses. If you withdrew $500 for an AP prep course that included $200 of account earnings, you might owe ~$15 in state taxes and $5 in penalties on the earnings.

2. Higher Annual Limits

The OBBBA increases the K–12 eligible expense limit from $10,000 to $20,000 per year starting in 2026. This helps families with kids in private school or specialized programs pay more out of their 529 tax-free. While this won’t affect most families, it’s a win for many families in big cities paying for private grade school.

For example, private grade school in Honolulu costs around $33,000 a year from K through grade 12. In San Francisco and New York City, tuition ranges from $45,000 to $65,000 annually. Being able to withdraw up to $20,000 per child from a 529 plan to cover these costs offers meaningful relief.

Take the classic $500,000 household with two kids in private school costing $100,000 a year total. That’s roughly $150,000 in gross income going just to tuition. After taxes, there net income after paying tuition might only be about $100,000 – $150,000 to pay for rent or a mortgage, food, transportation, clothes, and travel.

Using $40,000 in combined 529 plan funds helps stem the financial bleeding and adds much-needed flexibility. But to do so, the parents first have to save aggressively.

3. Postsecondary Credentials Now Covered

One of the biggest mental blocks for funding a 529 plan was: “What if my kid doesn’t go to college?” Section 70414 addresses that by allowing 529 funds to be used for:

• Industry-recognized credentials (e.g., Certified Financial Planner, CISSP, AWS certifications)
• Registered apprenticeships (e.g., electricians, plumbers)
• State-licensed professional programs (e.g., cosmetology, HVAC certification, masseuse)
• Any credential covered under the Workforce Innovation and Opportunity Act (WIOA)

Example: If your child wants to become a licensed HVAC technician and enrolls in a state-recognized training program costing $6,000, you can now pay for that program — and required equipment — using 529 funds tax-free.

With artificial intelligence poised to eliminate millions of white-collar office jobs in the coming years, it’s wise to consider careers in more AI-resistant industries.

Trades like plumbing and electrical work already offer six-figure income potential, and demand is only rising. After spending over $40,000 remodeling an in-law unit in Honolulu, I have no doubt that plumber and electrician earnings will continue to grow.

4. Coordinating With the AOTC Tax Credit

Another underutilized benefit is coordinating your 529 withdrawals with the American Opportunity Tax Credit (AOTC) — worth up to $2,500/year for four years. You can get the full credit if you spend $4,000 out-of-pocket on tuition and fees. Or, if you want to use 529 funds and still claim the AOTC, there’s a way to do that too — with a small tax hit.

Example:

• You withdraw $8,000 from a 529 plan for tuition.
• You claim the AOTC for $4,000 of those expenses.
• Now, only $4,000 of your 529 withdrawal counts as a qualified distribution.
• If half your withdrawal ($4,000) came from earnings, then $2,000 of earnings now becomes taxable income.
  At a 22% tax rate, you pay $440 in taxes — but still get a $2,500 tax credit.

This coordination gives you options if you’ve overfunded a 529 for qualified educational expenses or want to optimize your return. To clarify, the AOTC is a tax credit — it directly reduces your tax bill, dollar for dollar. A 529 distribution is tax-free only on earnings used for qualified expenses, not a dollar-for-dollar credit. Therefore, the AOTC tax credit will save you more.

5. The Ability To Roll Over Unused 529 Plan Money Into A Roth IRA

Although being able to roll over unused 529 plan money is thanks to the SECURE 2.0 Act, not the OBBBA, it’s still worth mentioning. Starting in 2024, unused 529 plan funds can now be rolled over into a Roth IRA for the beneficiary, up to a lifetime maximum of $35,000. This rule provides families with a valuable way to repurpose leftover education funds and kickstart a child’s retirement savings, tax- and penalty-free.

However, there are some key restrictions. The 529 account must have been open for at least 15 years, and only contributions (and their earnings) made more than five years ago are eligible. In addition, rollovers count toward the beneficiary’s annual Roth IRA contribution limit, which is $7,000 in 2025, and the beneficiary must have earned income equal to or greater than the rollover amount in that year.

For example, if your daughter worked part-time and earned $6,000 in 2025, you could roll over up to $6,000 from her 529 into her Roth IRA that year. This means it would take at least five years to fully roll over the $35,000 maximum, assuming she earns enough annually.

Even if you still have 529 plan money left over after the Roth IRA rollover, you can always designate the beneficiary to someone else. Your grandchildren need an education too.

Reinvigorated Educational Planning

Thanks to the OBBBA’s updates to 529 plans, I’m less concerned about overfunding two 529 plans. Instead, I now see more flexibility and utility than ever before. Whether my kids choose to attend college, pursue trade school, or follow a credentialed career path, the funds will be there—and they can now be used in more ways than before. And if they don’t use all the funds, I will sign the plans to their children.

Yes, I talk about wishing I could spend the 529 balance on enjoying life more today. But knowing my financial habits since graduating in 1999, I’ll probably just end up investing the money anyway.

If you’re a parent or grandparent, it’s a great time to revisit your 529 contribution strategy and take advantage of the new rules. Even if your estate is projected to fall under the estate tax threshold, consider contributing up to the gift tax limit anyway. Encourage your partner and the grandparents to do the same.

With these changes, the 529 plan has become one of the most powerful generational wealth transfer vehicles available. Rather than simply gifting cash, you’re passing down the opportunity for education, something that can be far more valuable over a lifetime.

Reader 529 Plan Questions

Readers, are you as pumped as I am that you can now use $20,000 a year from a 529 plan for private grade school tuition? Have you ever heard of the AOTC (American Opportunity Tax Credit) before? Do you think these enhanced 529 benefits will just make college even more expensive in the long run? And finally, how much do you think is too much to have saved in a 529 plan?

Diversify Beyond The 529 Plan

A 529 plan is one of the best tools to fund your child’s education tax-efficiently. But don’t stop there. Diversifying your family’s portfolio beyond education savings is just as important, especially if you want to give your kids optionality and financial security no matter what path they choose.

That’s why I’ve also invested in real estate through Fundrise, a platform that lets you passively invest in a diversified portfolio of residential and industrial properties. With over $3 billion in assets under management, Fundrise focuses on Sunbelt markets where valuations are more attractive and yields tend to be higher—an appealing hedge against inflation and market volatility.

You can also invest in Fundrise Venture, which provides exposure to private AI companies like OpenAI, Anthropic, and Databricks. With AI poised to reshape the job market and your children’s future career prospects, I want to make sure I’m investing not just in their education, but also in the technologies shaping tomorrow.

I’ve personally invested over $445,000 with Fundrise and Fundrise is a long-time sponsor of Financial Samurai. My thought process is that if I’m willing to invest $400,000+ in a 529 plan per kid, I should also be willing to invest at least $400,000 in private AI companies set to disrupt their lives. With a minimum investment of just $10, building generational wealth beyond the 529 plan has never been more accessible.