California 529 plan rules do not match federal rules, and the gap has widened in 2026. Federal law now lets families use a 529 account for up to $20,000 a year of K-12 tuition, for a longer list of K-12 costs, for professional credential programs, and even for a limited rollover into a Roth IRA. California has adopted none of those changes. For a Sacramento family, a withdrawal that is completely tax-free on the federal return can still produce a state tax bill and a state penalty.
This article explains where the two sets of rules agree, where they split, and what that means before you request a distribution.
What Changed at the Federal Level
The One Big Beautiful Bill Act, signed on July 4, 2025, made three notable changes to Section 529 of the Internal Revenue Code:
- Higher K-12 limit. Beginning with tax year 2026, the annual cap on tax-free withdrawals for elementary and secondary school expenses doubled from $10,000 to $20,000 per student.
- Broader K-12 expenses. The K-12 category is no longer limited to tuition. It now includes items such as curriculum materials, tutoring, standardized test fees, and dual-enrollment fees.
- Credential programs. Tuition, fees, books, and testing costs for recognized postsecondary credential programs, such as many trade licenses and certifications, can now be paid from a 529 account.
These build on an earlier change from the SECURE 2.0 Act: starting in 2024, a 529 account that has been open for at least 15 years may roll up to $35,000 over the beneficiary’s lifetime into a Roth IRA in the beneficiary’s name. Each year’s rollover is capped at the annual IRA contribution limit, which the IRS set at $7,500 for 2026, and contributions made in the last five years, plus their earnings, are not eligible. The IRS summarizes the general framework on its 529 plans questions and answers page.
How California 529 Plan Rules Differ
California generally follows the federal 529 framework, but it does so as of a fixed date and with specific exceptions. According to the Franchise Tax Board’s 2026 analysis of Assembly Bill 2444, California conforms to Section 529 as of January 1, 2025, and it has specifically declined to adopt both the K-12 provisions and the 529-to-Roth rollover. Because the 2025 federal expansions arrived after that conformity date, they are not part of California law unless the Legislature acts.
The 2.5 percent state penalty
When California treats a withdrawal as nonqualified, the earnings portion is added to your California taxable income and an additional 2.5 percent state tax applies to those earnings. That additional tax is California’s counterpart to the 10 percent federal penalty, and it is reported on Form FTB 3805P. Only the earnings portion is affected; your original contributions come back to you without state tax.
Where California does agree
The core use of the account is unchanged. Withdrawals for qualified college and graduate school costs, including tuition, fees, books, required equipment, and room and board for students enrolled at least half time, are tax-free for both federal and California purposes. California also conforms to two 2019 federal additions: registered apprenticeship program costs, and up to $10,000 of lifetime student loan repayment per beneficiary.
Federal Versus California: Common Withdrawals Compared
The table below compares how each government treats the earnings portion of several common withdrawals under 2026 law. Green means the earnings are tax-free. Blue means the earnings are taxable and generally subject to a penalty.
| Use of funds | Federal | California |
|---|---|---|
| College tuition, fees, books, room and board | Tax-free | Tax-free |
| Registered apprenticeship costs | Tax-free | Tax-free |
| Student loan repayment, up to $10,000 lifetime | Tax-free | Tax-free |
| K-12 tuition, up to $20,000 per year | Tax-free | Taxed + 2.5% |
| K-12 tutoring, curriculum, test fees | Tax-free | Taxed + 2.5% |
| Postsecondary credential programs | Tax-free | Not adopted |
| Rollover to beneficiary’s Roth IRA | Tax-free | Taxed + 2.5% |
| Anything else (nonqualified) | Taxed + 10% | Taxed + 2.5% |
A Simple K-12 Example
Consider a hypothetical family that withdraws $15,000 from a 529 account to pay private high school tuition in 2026. Assume one-third of the account balance is earnings, so $5,000 of the withdrawal is earnings and $10,000 is a return of contributions. Assume the family’s marginal California rate is 9.3 percent.
- Federal: the withdrawal is within the $20,000 K-12 limit, so it is tax-free.
- California: the $5,000 of earnings is added to state taxable income, producing roughly $465 of state income tax, plus $125 of additional tax at 2.5 percent.
Under these assumptions, the state cost is roughly $590. That is not a reason to avoid using the account for K-12, but it is a cost worth weighing against the benefit of keeping those dollars invested for college, where California still offers full tax-free treatment.
Is California Likely to Change Its 529 Rules?
Proposals surface regularly. Assembly Bill 2444, introduced in February 2026, would have created a state deduction for ScholarShare 529 contributions and would have temporarily conformed to the federal 529-to-Roth rollover. In May 2026 it was held under submission in committee, which usually ends a bill for the session. Similar deduction bills introduced in 2022, 2023, and 2025 did not become law, and the 2022 version was vetoed. For planning purposes, it is sensible to assume California’s current rules will remain in place until a change is actually enacted.
It is also worth knowing that California offers no state income tax deduction for 529 contributions, whether you use ScholarShare 529 or another state’s plan. California residents may use any state’s 529 plan, and the California tax treatment of withdrawals is the same regardless of which plan holds the money.
Practical Steps for California 529 Owners
- Check the purpose before you withdraw. Match each distribution to a specific expense in the same calendar year, and keep receipts.
- Consider paying K-12 costs from other savings. If cash flow allows, leaving the 529 untouched until college preserves both the federal and California tax benefits.
- Plan any Roth rollover deliberately. A rollover still helps federally, and the California cost falls only on earnings. Spreading rollovers over several years at $7,500 or less keeps each year’s state tax modest. You can read more about current limits in our guide to 2026 Roth IRA contribution limits.
- Look at other options for leftover funds. Changing the beneficiary to a sibling, cousin, or parent keeps the money tax-free for qualified use. For a beneficiary with a disability, a rollover to an ABLE account may be available; see our overview of ABLE accounts in California.
- Tell your tax preparer. Federal Form 1099-Q does not flag California differences. A K-12 or Roth rollover distribution needs an adjustment on Schedule CA and possibly Form FTB 3805P.
The Bottom Line
A 529 account remains one of the most effective ways for California families to save for college. The difference is that California 529 plan rules have stayed focused on higher education while federal law has expanded in several directions. Knowing which withdrawals cross that line lets you decide with full information instead of discovering a state bill the following April.
If you would like help coordinating education savings with your retirement and tax planning, we invite you to schedule a free 30-minute call with Rooney Wealth Management. We work with families across the Sacramento region to build plans that account for both federal and California rules.
Rooney Wealth Management LLC is an investment adviser registered with the state of California. This article is for educational purposes only and is not tax, legal, or investment advice. Please consult your tax or financial professional regarding your specific situation.
