Federal Expansion Signed Into Law

A major change to 529 college savings plans was enacted this summer. In early July 2025, the One Big Beautiful Bill Act was signed into law, expanding the definition of qualified 529 plan. For the first time, 529 funds can be used tax-free for certain professional certifications, licenses, and other career-related credentials – not just college tuition. This new law broadens 529 plan eligibility to include a wide range of workforce training and credentialing costs reflecting a shift from “college-only” savings to “career” savings.

What Expenses Now Qualify under 529 Plans

Under the expanded rules, many non-degree programs and credentialing costs now count as qualified education expenses. Beginning with distributions made after July 4, 2025, account owners can tap 529 funds for a broader range of postsecondary training expenses. Newly eligible uses include:

• Professional license and certification costs – prep courses and exam fees for licenses like the CPA, bar exam, real estate license, FINRA certifications, etc.
  
• Required continuing education (CE) – coursework needed to maintain a professional license or certification.
• Skilled trades and vocational programs – e.g. CDL truck driving courses, HVAC technician training, welding or electrician certifications.
  
• Books, supplies, and equipment – materials required for an approved credentialing or licensing program.
  

To qualify, the program generally must lead to a recognized postsecondary credential. The intent is to cover bona fide career-oriented education. Leisure courses or general self-improvement classes without a formal credential remain ineligible.

Effective Date and Implementation

Importantly, this expansion is effective for withdrawals made on or after July 5, 2025 (immediately after the bill’s signing). Funds pulled from a 529 plan before that date for credentialing purposes would not be federally tax-free. Going forward, however, qualified expenses for approved credential programs enjoy the same federal tax advantages as traditional higher-education expenses. In other words, earnings taken out for these newly eligible costs will not be subject to federal tax or the 10% penalty.

Guidance for CPAs and Their Clients

With these changes now in place, Colorado CPAs should be prepared to advise clients on how to take advantage of the new rules – and avoid pitfalls. Here are a few key considerations to discuss with clients:

• Confirm the program’s eligibility: Not every course or certificate will qualify. Make sure the credential program is a recognized one that meets the federal criteria. Encourage clients to verify that the program or certification they’re pursuing is on an approved list or otherwise meets the definition of a “recognized postsecondary credential program.”
  
• Time distributions correctly: Advise clients that the 529 funds should be withdrawn after the effective date (July 2025).. Using funds for a course or exam too early (before mid-2025) could mean losing the tax-free benefit. Going forward, coordinate the timing of withdrawals with when the qualified expenses will be paid, just as you would for college tuition payments.
  
• Mind state tax treatment: Federal law now treats these credential costs as qualified, but each state may differ. In Colorado, state tax rules have not yet caught up (see next section). Clients need to know that even if an expense is federally qualified, it could be considered non-qualified by Colorado, affecting state taxes.
  

In addition, normal 529 planning advice still applies: maintain documentation of the expenses (receipts for courses, exam fees, materials, etc.), and if clients have excess 529 funds from one beneficiary, remember they can change the beneficiary or roll over funds if needed rather than take a non-qualified withdrawal. The new law’s flexibility means more options to use leftover college savings for career growth.

Colorado-Specific Tax Considerations

One caveat for Colorado taxpayers is that state income tax treatment has not yet aligned with the new federal rules. Colorado law currently defines qualified 529 withdrawals more narrowly, essentially only for higher-education tuition and related expenses. Expenses like K–12 tuition or professional training programs are not (as of now) recognized as qualified by Colorado’s tax code. This means that a distribution used for a certification course or license exam, while tax-free federally, could be considered a non-qualified withdrawal at the state level.

The practical impact is two-fold:

1. Potential recapture of Colorado tax deduction. Colorado allows taxpayers to deduct 529 contributions from state income. If those contributions are later withdrawn for a purpose Colorado doesn’t deem qualified, the prior deduction may be subject to recapture.
   
2. State tax on earnings. The earnings portion of a non-qualified 529 withdrawal would become taxable income in Colorado, even though the IRS would not tax it in this case.
   

Bottom line for Colorado CPAs: alert your clients to this discrepancy. Until Colorado amends its statutes to include these professional credential expenses as qualified, there could be state tax consequences for using 529 money in this way. Advise clients to consult you before taking such distributions, and stay tuned for possible state legislative changes. 

Advocacy

These changes are the direct result of strong advocacy efforts by the AICPA and the COCPA, made possible by the support of members like you. Click here to learn more about how COCPA advocates for the profession.