Tax Advantages of a Qualified Tuition Program

What is a Qualified Tuition Program?

Qualified tuition programs (QTPs) are programs established and maintained by the individual states, or by educational institutions, that allow you to prepay tuition, or contribute to a savings account that is set up to pay a student’s qualified education expenses. Qualified tuition programs are also known as 529 plans, in reference to the Internal Revenue Code section that covers them.

Prepayments of educational expenses and contributions to a QTP are not tax-deductible for U.S. federal income tax purposes, but earnings accumulate tax-free, and distributions from the plan are not taxable if they are used to pay qualified educational expenses. 

Prepaid Tuition and College Savings Plans

There are basically two types of 529 plans: 
· Prepaid tuition plans allow parents or other student sponsors to lock in future tuition costs at in-state public colleges at today’s prices. When you prepay tuition, the colleges carry the risk and protect you from tuition increases in the future. For example, if you prepay a year of tuition for your child now, your child can redeem that full year of tuition when it is time to attend college, without having to pay the increase in tuition.
· A college savings plan allows you to set aside funds for the beneficiary’s future education. Earnings on the account balance accumulate tax-free, and distributions are generally not taxable. A savings plan allows you more flexibility in choosing a college.

Since 529 plans are established by the states or by educational institutions, it is necessary to inquire as to the individual plan requirements and specifications. There may be state income tax advantages, such as tax exemptions for withdrawals or deductions for contributions to the plan, in addition to the federal income tax benefits of deferring tax on earnings and taking tax-free distributions for paying educational expenses. 

Independent 529 Plan