Qualified Tuition Plans

Qualified Tuition Plans

Qualified Tuition Plans (QTPs), or Section 529 plans, offer two different ways to help defray the cost of college: College Savings Plans that allow students of all ages to save for college costs or Prepaid Tuition Plans that lock in today's tuition rates at any of a state's eligible public colleges or universities.

QTPs are sponsored by your state, or their agencies or institutions. Also, as of 2001, private eligible education institutions, including religious schools, can offer QTPs in the form of prepaid tuition credits.

Just like an ESA, your QTP savings plan grows tax-deferred, you can take distributions from a QTP tax-free for qualified education expenses, and you can change beneficiaries to another family member at any time. Plus, with a QTP account, you're allowed to roll savings from one QTP to another without penalty, one time during a one-year period.

Anyone can establish a QTP, including your child's grandparents, other relatives or non-relatives. (You can even set one up for yourself.) A QTP account takes cash contributions only, not stocks or mutual funds.

The account holder controls funds in the account, not the beneficiary. And, for most plans, the beneficiary does not have to attend a school in the same state in which the QTP was set up.

Contributions to a QTP are not tax deductible at the federal level, but some states allow tax deductions for contributions to their own plans.

Unlike other education provisions, QTP contributions and tax-exempt distributions are not subject to any income limitations.

If you're applying for financial aid, distributions from prepaid tuition accounts are treated as the student's income.

S. Raines, Sr. Financial Advisor/Tax Preparer