Have you heard of a qualified tuition program or often called by IRS insiders a “QTP.” I bet you have! QTPs are better known as 529 plans. If you still haven’t heard of it or aren’t sure how they work then this quick tip is for you.
A QTP is a program established by a state that allows you to either prepay a beneficiary’s qualified higher education expenses at an eligible educational institution or contribute to an account for paying those expenses. This account can then be invested in mutual funds so that money can grow over time. An eligible institution is generally any college, university, vocational school, or postsecondary educational institution. The contributions to qualified tuition programs cannot be more than the amount necessary to provide for the qualified higher education expenses of the beneficiary. Contributions to a QTP are not deductible however, the earnings can accumulate tax free while in the account. Generally the beneficiary does not have to include the earning from a QTP in income. So no tax is due as long as the money goes to pay qualified education expenses. Note: you can change the beneficiary if the first beneficiary doesn’t use all the money.
For additional information, refer to Chapter 8 of Publication 970, Tax Benefits for Education. You should also check out our article on Coverdell Education Savings Accounts for an alternative to a qualified tuition program. Or reach out if you need some help planning for college.