What Is a QTP? Rules for Qualified Tuition Programs

A Qualified Tuition Program, or QTP, is a tax-advantaged savings plan designed to help families set aside funds for future education costs. While the formal name used by the Internal Revenue Service (IRS) is QTP, these plans are more commonly known as 529 plans, named after the section of the tax code that created them. These state-sponsored programs allow individuals to save money that can grow over time and then be withdrawn to pay for a designated beneficiary’s schooling, preparing them for educational costs in a tax-efficient manner.

Understanding the Structure of a QTP

Every Qualified Tuition Program involves two central figures: the account owner and the beneficiary. The account owner is the individual who establishes the plan, contributes funds, and maintains control over the account, including investment decisions and withdrawal authorizations. The beneficiary is the student for whom the money is being saved. An account owner can set up a plan for a relative, a friend, or even themselves, with no income restrictions placed on either party.

There are two distinct types of QTPs available: education savings plans and prepaid tuition plans. Education savings plans are the most common and function like investment accounts where contributions are invested and the account’s value fluctuates with market performance. This structure offers flexibility, as the funds can be used at nearly any accredited postsecondary institution for a broad range of expenses.

Prepaid tuition plans allow the account owner to purchase tuition credits at today’s prices for future use at eligible public and sometimes private colleges. This locks in tuition rates against inflation. While they offer cost certainty for tuition and mandatory fees, they are generally less flexible, often requiring state residency and do not cover expenses like room and board. Because of their broader applicability, education savings plans are the more prevalent choice.

Contributions and Associated Tax Benefits

Contributions to a QTP are not federally deductible but are given special consideration for gift tax purposes. While there are no federal limits on annual contributions, individual plans have aggregate limits, which can range from $235,000 to over $500,000. Contributions are treated as completed gifts to the beneficiary and are subject to the annual gift tax exclusion, which for 2025 is $19,000 per individual or $38,000 for a married couple.

QTPs allow for “superfunding” an account by making five years’ worth of contributions in a single year without triggering the gift tax. This allows an individual to contribute up to $95,000, or a couple up to $190,000, at one time for a single beneficiary. To do this, the contributor must file IRS Form 709, the United States Gift Tax Return, to treat the contribution as if it were made evenly over a five-year period.

The primary tax advantage is that any investment earnings within the account accumulate on a tax-deferred basis, meaning no federal income tax is paid on the growth as it occurs. Many states also offer their own tax incentives, such as a state income tax deduction or credit for contributions made to their specific in-state plan.

Permissible Withdrawals for Educational Expenses

Funds held within a QTP can be withdrawn tax-free to cover a specific set of costs known as Qualified Higher Education Expenses (QHEE). These expenses include tuition, mandatory fees, books, supplies, and equipment required for enrollment at an eligible educational institution. Eligible institutions include colleges, universities, and vocational schools that can participate in federal student aid programs.

For students enrolled at least half-time, room and board costs are also a qualified expense. The amount that can be withdrawn for room and board cannot exceed the allowance included in the school’s official cost of attendance or the actual amount charged for university-owned housing. Expenses for a computer, peripheral equipment, software, and internet access are also permissible withdrawals if used primarily by the beneficiary during enrollment.

Federal law has expanded the definition of qualified expenses. Account holders can now withdraw up to $10,000 annually per beneficiary for tuition at an elementary or secondary public, private, or religious school. The law also allows for the repayment of qualified student loans, with a lifetime limit of $10,000 per beneficiary and an additional $10,000 for each of the beneficiary’s siblings. Funds can also be used for fees, books, and supplies required for a registered apprenticeship program.

Rules for Non-Qualified Distributions and Rollovers

When funds are withdrawn from a QTP for purposes other than qualified education expenses, the distribution is considered non-qualified. The tax consequences for such a withdrawal apply only to the earnings portion of the funds, as original contributions are always returned tax-free. The earnings are subject to ordinary income tax plus a 10% federal penalty tax.

QTPs offer flexibility through rollovers. An account owner can change the designated beneficiary to another eligible family member, such as a sibling or cousin, without tax consequences. It is also permissible to move funds from one QTP to another for the same beneficiary once during any 12-month period, which allows account owners to switch to a plan with better investment performance or lower fees.

The SECURE 2.0 Act provides another option for unused funds, allowing money from a QTP to be rolled over to a Roth IRA for the beneficiary. To be eligible, the QTP must have been open for at least 15 years, and contributions made within the last five years are not eligible for rollover. The amount rolled over is subject to the beneficiary’s annual Roth IRA contribution limit ($7,000 for 2025) and a lifetime maximum of $35,000. This provision offers a way to convert education savings into retirement savings, preventing potential taxes and penalties on leftover funds.