A Qualified Tuition Program (QTP), also known as a Section 529 plan, is a program set up and managed by a state, or a state agency or instrumentality. It allows contributors to either prepay a beneficiary's qualified higher education expenses at an eligible educational institution or contribute to an account used to pay for those expenses. In some cases, eligible educational institutions can also establish QTPs, but only for prepaying a beneficiary's higher education expenses.
Qualified Higher Education Expenses
Qualified expenses generally cover the costs of enrollment or attendance at eligible postsecondary institutions, including colleges, universities, vocational schools, or any other institutions eligible to participate in student aid programs under the Department of Education.
In addition, QTPs can be used to cover tuition costs for elementary or secondary education (grades K-12) at public, private, or religious schools. These expenses are capped at $10,000 per year from all of the beneficiary’s QTP accounts.
Qualified expenses also include:
Fees, books, supplies, and equipment necessary for participation in a registered apprenticeship program (certified by the Secretary of Labor).
Repayments on qualified education loans in limited amounts.
Contributions to QTPs
Contributions made to a QTP on behalf of a beneficiary cannot exceed the amount required to cover their qualified education expenses. To determine the contribution limit, consult the program's trustee or administrator.
It's important to note that QTP contributions are not tax-deductible.
Benefits of a QTP
There are several tax-related advantages to establishing a QTP:
Tax-Free Growth: Earnings in the account grow tax-free.
Tax-Free Distributions: Distributions used for qualified expenses (including K-12 tuition) are not subject to tax.
If a distribution exceeds the qualified expenses, the excess portion of the earnings becomes taxable.
Funds can be withdrawn to pay student loans (for the beneficiary or their sibling), with a lifetime distribution cap of $10,000 per individual. However, interest paid using QTP funds does not qualify for the student loan interest deduction.
QTP Rollover to a Roth IRA
Starting with distributions made after December 31, 2023, beneficiaries of a QTP can execute a special rollover distribution from their QTP to a Roth IRA. To be tax-free, the rollover must:
Be processed through a direct trustee-to-trustee transfer.
Comply with the Roth IRA annual contribution limit.
Remain within a $35,000 lifetime cap.
Come from a QTP account that has been open for at least 15 years.
Not exceed contributions (plus earnings) made at least five years before the distribution date.
For further details, refer to:
Publication 970: Tax Benefits for Education.
Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs).
Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs).
Distributions and Reporting
If you receive a QTP distribution, you should get a Form 1099-Q (Payments from Qualified Education Programs) from each program that issued a distribution. The form will display:
Box 1: Gross distribution amount.
Box 2: Earnings portion.
Box 3: Basis or return of investment.
Form 1099-Q should be made available by January 31, 2025.