529 College Savings Plans or Qualified Tuition Programs (QTP)

"529 College Savings Plans or Qualified Tuition Programs (QTP)" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 9th January 2012

A Qualified Tuition Program (QTP) also called "529 plan", formerly called a Qualified State Tuition Program (QSTP), is a program established and maintained by a state, or agency or instrumentality of a state, to allow either prepaying, or contributing to an account established for paying a student's qualified higher education expenses at an eligible educational institution. Eligible educational institutions can establish and maintain QTP(s) to allow prepaying a student's qualified higher education expenses. The main advantage of saving with a 529 plan is that earnings are exempt from federal income taxes when the funds are withdrawn for qualified education expenses. A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary.

Distributions from state tuition savings programs and prepaid tuition plans are tax-free for federal income tax purposes, if withdrawals are used for qualified higher education expenses. Similar withdrawals from qualified prepaid tuition plans for private colleges are also taxfree. Accumulations may be rolled over, taxfree, from one 529 plan to another once every 12 months. You may not report payment of the same educational expenses from both 529 plans and ESAs. Likewise, the education expenses covered by Hope or Lifetime Learning credits do not qualify for tax-free distributions from 529 plans or ESAs. Nonqualified withdrawals from 529 plans will be subject to the same 10 percent tax penalty on deferred earnings that applies to ESAs, which is in addition to normal federal income taxes.

A qualified tuition program (QTP) is a program set up to prepay, or contribute to an account established for paying; a student’s qualified education expenses5 at an eligible educational institution. QTPs can be established and maintained by states (state programs are called “529 plans”) and eligible educational institutions. 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.

Qualification:

The designated beneficiary is generally the student (or future student) for whom the QTP is intended. The 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 beneficiary is the person who receives the interest as a scholarship.

How do you get it?

Contributions to a QTP cannot be more than the amount necessary to provide for the qualified education expenses of the designated beneficiary. There are no income restrictions on the individual contributors. You can contribute to both the QTP and a Coverdell ESA in the same year for the same designated beneficiary.

Differences between 529 pre-paid tuition plans and college savings plans:

There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan. The following chart outlines some of the major differences between pre-paid tuition plans and college savings plans:

Prepaid Tuition Plan College Savings Plan
Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor. The first 529 program is the BEST Prepaid Plan, which allows individuals to purchase "tuition units". These "tuition units" increase in value based on the weighted average tuition increases at your universities. College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.
Locks in tuition prices at eligible public and private colleges and universities. No lock on college costs.
All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses. Covers all "qualified higher education expenses," including: Tuition, Room & board, Mandatory fees and Books, computers (if required).
Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased. Many plans have contribution limits in excess of $200,000.
Many state plans guaranteed or backed by state. No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.
Most plans have age/grade limit for beneficiary. No age limits. Open to adults and children.
Most state plans require either owner or beneficiary of plan to be a state resident. No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.
Most plans have limited enrollment period. Enrollment open all year.

Myths and Actual Facts About 529 Plans:

1. MYTH: 529 plans are only for wealthy investors.

FACT: 529 plans have much lower required minimum contribution amounts than many other investments, making them accessible and convenient for families of any income level. Families can usually start a plan with as little as $15 to $25 per month.

2. MYTH: I can just take out loans to pay for college, or my child will get financial aid.

FACT: Approximately 60 percent of federal financial aid comes in the form of student loans, and all loans represent debt that a family must incur. Any savings, even in small increments, that a family can put away will offset the final amount of debt it must take on to pay for college.

3. MYTH: Due to the recession and state budget gaps, investors in prepaid 529 plans have lost all of their investment.

FACT: There are currently 13 states that offer a Prepaid Tuition or Guaranteed Savings Plan that allow for the pre-purchase of tuition based on today's rates to be paid out at the future cost when the beneficiary is in college. While some states needed to rectify budget gaps created by the recent financial crisis, to date, a prepaid tuition plan has never run out of money to pay back investors.

4. MYTH: 529 plans are only for young children.

FACT: There is no maximum age for a 529 plan. Assets may be used at eligible schools offering adult career training or advanced degrees, including part-time programs.

5. MYTH: If I save now, my child won’t be eligible to receive as much financial aid later.

FACT:The Deficit Reduction Act of 2005 specifies that funds saved in 529 plans are generally considered to be parental assets, which means that only about six percent of these assets are currently counted towards the family’s expected contribution in federal need-based financial aid calculations.

6. MYTH: A 529 plan can only be used at schools in my home state.

FACT: Assets from 529 plans may be used at any school that is accredited and eligible to accept federal financial aid. This includes nearly all public and private colleges in the United States and many trade and technical schools as well. It even includes some colleges located outside of the US.

7. MYTH: The tax advantages of 529 plans will expire.

FACT: The Pension Protection Act of 2006 repealed the 2010 sunset of the federal tax exemption for Section 529 plans and ensures that money saved for higher education in 529 plans can continue to be used tax-free to help pay for college.

8. MYTH: A 529 plan can only be used for a four-year college.

FACT: Assets from 529 plans may be used at any eligible school, including two- and four-year colleges, graduate schools and vocational and technical schools. Funds may be used for tuition, fees, certain room and board costs, and in 2010, computers and course-related software.

9. MYTH: If my child doesn’t go to college, I will lose my money.

FACT: A 529 account holder can change the plan’s beneficiary to another eligible “member of the family,” such as siblings or even oneself with no tax penalty.

10. MYTH: Opening a 529 plan is complicated.

FACT: Most 529 plans allow account holders to open an account online, and a wealth of information is available online for families seeking more information about 529 plans. CSPN’s Web site, www.CollgeSavings.org, offers convenient tools and valuable information to help families make wise decisions about saving for college.

When is it available?

The benefit becomes available as soon as the student incurs qualified education expenses. An American Opportunity/Hope or Lifetime Learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits.

Can a family claim multiple benefits?

If a designated beneficiary receives distributions from the QTP and a Coverdell ESA in the same year, and the distributions total more than the beneficiary’s adjusted qualified higher education expenses, the expenses must be allocated between the distributions. 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.

Even if a QTP is used to finance a student’s education, the student or student’s parents may still be eligible to claim either the American Opportunity/Hope credit or Lifetime Learning credit.

In addition, check out the 529 savings plan for more than 200 independent colleges at www.independent529plan.org/

With ScholarShare, California's official 529 college savings plan, earnings on investments grow tax-deferred, and disbursements, when used for qualified higher education expenses, are federal and state tax-free. The ScholarShare College Savings Plan is administered by the ScholarShare Investment Board, an agency of the State of California. To learn more, visit www.scholarshare.com.

New York's 529 College Savings Program currently includes two separate 529 plans. The Direct Plan is sold directly by the Program. You may also participate in the Advisor Plan, which is sold exclusively through financial advisors and has different investment options and higher fees and expenses as well as financial advisor compensation., Visit: https://uii.nysaves.s.upromise.com/content/taxbenefits.html

In Georgia there are second 529 program is the Path2College 529 Plan. BEST contracted with the Georgia Higher Education Savings Plan (GHESP) to promote the Path2College 529 Plan. The Path2College 529 Plan offers seven investment options ranging from conservative to aggressive and a low annual asset based fee. Visit: http://www.path2college529.com/

Note: No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary’s adjusted qualified education expenses. Qualified education expenses include special-needs services, tuition, fees, books, supplies and equipment if required for enrollment or attendance at an eligible institution. Expenses for room and board may qualify if the student is enrolled at least half time. For 2009 and 2010, computer technology or equipment purchased for educational purposes can be paid for by a 529 plan. For details, go to www.irs.gov/recovery.

For Your Information: This information’s covers a variety of important tax topics related to higher education. It is intended for your educational use and not as legal or tax advice; it does not cover every facet or the full scope of this subject. We highly recommend that you consult a professional tax advisor or attorney and encourage you to visit the Internal Revenue Service Web site, where you will find the complete text of various relevant IRS publications.

IRS Publications

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