What Is the Freedom to Invest in Tomorrow’s Workforce Act?

The Freedom to Invest in Tomorrow’s Workforce Act is proposed bipartisan legislation to amend the Internal Revenue Code regarding 529 plans. These state-sponsored savings accounts offer tax-exempt growth and withdrawals for qualified higher education expenses. The act would broaden the definition of qualified expenses to include costs for workforce development and credentialing programs. This change would allow individuals to use their 529 savings for these non-traditional educational paths. The bills were introduced in Congress in 2023 but have not become law.

Expanding Qualified Higher Education Expenses

The act would broaden the scope of what constitutes a qualified expense for tax-free withdrawals from a 529 plan, targeting the costs of obtaining and maintaining professional credentials. 529 funds could be used for expenses such as:

• Fees for certification exams, which can range from under a hundred to several thousand dollars.
• Required preparatory courses and practice exams needed to sit for a final test.
• Books, supplies, and equipment required for enrollment, such as a set of tools for an electrician or mechanic.
• Expenses for continuing education and the renewal of certifications or licenses.

This expansion provides greater flexibility for American workers. By covering these specific, often costly, components of non-degree training, the legislation makes career advancement and changes more financially accessible. Including these tangible costs addresses the financial hurdles that can prevent individuals from pursuing skilled trades and professional certifications.

Eligible Programs and Individuals

The Freedom to Invest in Tomorrow’s Workforce Act would extend the benefits of 529 plans to a wider range of individuals and educational programs beyond traditional four-year colleges. The legislation is crafted to support those pursuing career growth, making mid-career changes, or seeking alternative pathways to employment. This includes workers, with or without a college degree, who are looking to acquire specialized skills to enter or advance in a particular field.

For a program to qualify under the proposal, it must meet criteria that establish its value in the workforce. The act would include programs recognized under the Workforce Innovation and Opportunity Act (WIOA), a federal law connecting job seekers with training services. Additionally, programs that appear on a state’s list of eligible training providers would also qualify, ensuring funds are directed toward credible programs.

The legislation specifically aims to cover postsecondary training and credentialing programs, including licenses and non-governmental certifications. This could encompass a wide array of fields, such as information technology, healthcare, mechanics, and cosmetology, where certifications are often the primary qualification for employment.

Using 529 Plan Funds for Newly Eligible Expenses

If the act becomes law, using 529 plan funds for these newly eligible expenses will require proper documentation. Account holders must maintain records to prove an expense is qualified, including invoices for tuition, receipts for required books and tools, and proof of payment for certification exam fees. These documents serve as the basis for justifying a tax-free withdrawal to the IRS.

The mechanics for taking a distribution would likely remain consistent with existing 529 plan rules. An account holder can request a withdrawal from their plan administrator, with the option to have the payment sent directly to the program provider. Alternatively, the account holder can pay for the expense out-of-pocket and then request a reimbursement from the 529 plan.

When requesting a reimbursement, it is important to align the timing of the withdrawal with the payment of the expense. The distribution must occur in the same tax year that the qualified expense was paid to avoid potential tax complications. The account holder is responsible for ensuring the withdrawal amount does not exceed the total cost of the qualified expenses. Failure to provide adequate documentation or withdrawing more than the qualified amount could result in the earnings portion of the distribution being subject to income tax and a 10% penalty.