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Qualified Tuition Program (QTP or "529 Plan")

 

Image of graduation cap and diploma resting on top of financial documents, with text '529 Plan' superimposed.A Qualified Tuition Program (QTP) is one type of Educational Program Account. This topic provides a comprehensive description of it as defined under Section 529 of the Internal Revenue Code (IRC).

 

For a discussion of eligibility implications for Supplemental Security Income (SSI) recipients that may come into play when these accounts are established, funded, or funds are distributed from them, see the Educational Program Accounts topic.

You may read this topic in sequence or jump to a specific section:

              Introduction

o                      What is the tax benefit of a QTP?

              What Is a Qualified Tuition Program?

o                      Qualified education expenses

o                      Designated beneficiary

o                      Eligible educational institution

              How Much Can You Contribute?

              Are Distributions Taxable?

o                      Earnings and return of investment

o                      Additional Tax on Taxable Distributions

o                      Rollovers and Other Transfers

o                      Members of the Beneficiary's Family

Introduction

Qualified Tuition Programs (QTPs) are also called "529 plans," and were formerly called a Qualified State Tuition Program (QSTP)

States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution (defined below). Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. You cannot deduct either payments or contributions to a QTP. For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it.

What is the tax benefit of a QTP?

No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. See Are Distributions Taxable?, below, for more information.

Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim either the Hope Credit or the Lifetime Learning Credit.

What Is a Qualified Tuition Program?

A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. The program must meet certain requirements. Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP.

Qualified education expenses

These expenses are the amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution (defined below). They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. The cost of room and board qualifies only to the extent that it is not more than the greater of the following two amounts:

              The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

              The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

You will need to contact the eligible educational institution for qualified room and board costs.

The definition of qualified education expenses was expanded in 2002 to include expenses of a special needs beneficiary that are necessary for that person's enrollment or attendance at an eligible educational institution.

Designated beneficiary

The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. The designated beneficiary can be changed after participation in the QTP begins. If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship.

Eligible educational institution

For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

How Much Can You Contribute?

Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. There are no income restrictions on the individual contributors.

You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary.

Are Distributions Taxable?

The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. This is a return of the investment in the plan.

The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses.

Note: Before 2004, the beneficiary had to include in income any earnings distributed from a QTP established and maintained by an eligible educational institution.

Earnings and return of investment

You will receive a Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530), from each of the programs from which you received a QTP distribution. The amount of your gross distribution shown on each form will be divided between your earnings and your basis, or return of investment.

Additional Tax on Taxable Distributions

Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. There are a number of exceptions to this rule.

One of the exceptions provides that the 10% additional tax does not apply to distributions made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

Rollovers and Other Transfers

Assets can be rolled over or transferred from one QTP to another. In addition, the designated beneficiary can be changed without transferring accounts.

Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution.

Members of the Beneficiary's Family

For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary:

              Son, daughter, stepchild, foster child, or a descendant of any of them.

              Brother, sister, stepbrother, or stepsister.

              Father or mother or ancestor of either.

              Stepfather or stepmother.

              Son or daughter of a brother or sister.

              Brother or sister of father or mother.

              Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

              The spouse of any individual listed above.

              First cousin.

Also see:

Educational Program Accounts

Coverdell Education Savings Account (ESA)

Source

IRS Publication 970, Tax Benefits for Education, Chapter 8, available at:
http://www.irs.gov/publications/p970/ch08.html


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