What Is a Qualified Tuition Program?
Understand the structure of a Qualified Tuition Program and how its rules on contributions and distributions enable tax-free funding for educational expenses.
A Qualified Tuition Program (QTP), commonly known as a 529 plan, is a tax-advantaged savings plan designed to help families set aside funds for future education costs. Established under Section 529 of the Internal Revenue Code, these plans allow savings to grow and be withdrawn tax-free when used for specific educational purposes.
Types of Qualified Tuition Programs
There are two main categories of Qualified Tuition Programs. The first is the prepaid tuition plan. This type allows an account owner to purchase credits or units at today’s prices, which can then be used in the future to cover tuition and mandatory fees at eligible institutions. These plans are often sponsored by state governments and are designed to lock in current tuition rates, providing a hedge against future inflation in education costs.
The more common option is the education savings plan. These accounts function like investment vehicles where contributions are invested in a portfolio of mutual funds or similar assets. The account’s value fluctuates with market performance, offering the potential for growth. Education savings plans provide greater versatility, as the funds can be used at nearly any accredited postsecondary institution for a wide range of expenses beyond just tuition.
Contributions and Account Ownership
Every QTP has an account owner and a designated beneficiary. The owner is the individual who establishes and controls the account, managing contributions, investments, and withdrawals. The beneficiary is the student for whom the funds are intended. While often a parent or grandparent, anyone can open an account and contribute on behalf of a beneficiary.
From a tax perspective, contributions to a QTP are considered completed gifts to the beneficiary. There are no federal annual contribution limits, but many plans have high aggregate limits. For 2025, an individual can contribute up to $19,000 per beneficiary without gift-tax consequences under the annual gift tax exclusion. Married couples can jointly contribute up to $38,000.
A feature of QTPs is the ability to make a lump-sum contribution, sometimes called “superfunding.” This rule allows a contributor to make five years’ worth of gifts in a single year. For 2025, this means an individual can contribute up to $95,000 ($190,000 for a married couple) at one time, provided no other gifts are made to that beneficiary during the five-year period. To make this election, the contributor must file IRS Form 709, the Gift Tax Return.
Tax Treatment of Distributions
The main benefit of a QTP is that distributions are free from federal income tax, provided the money is used for qualified education expenses. These expenses cover the costs necessary for enrollment and attendance at an eligible educational institution and include:
- Tuition and fees
- Books, supplies, and required equipment
- Computers, peripheral equipment, and software
- Internet access used by the student
The definition of qualified expenses also includes room and board, as long as the student is enrolled at least half-time. Recent legislative changes allow for up to $10,000 per year to be withdrawn tax-free for tuition at K-12 schools. Additionally, QTP funds can cover expenses for certain apprenticeship programs registered with the Secretary of Labor, including fees, books, and supplies. A lifetime limit of $10,000 per beneficiary can also be used to pay the principal and interest on qualified student loans.
If funds are withdrawn for non-qualified purposes, the portion representing original contributions is returned tax-free. The earnings portion, however, is subject to ordinary income tax and an additional 10% federal penalty. For example, if an account holds $15,000 in contributions and $5,000 in earnings, the earnings are 25% of the total balance. If a $4,000 non-qualified withdrawal is made, 25% of that withdrawal ($1,000) is considered earnings and will be taxed and penalized, while the remaining $3,000 is a tax-free return of principal.
Rollover Rules
QTP funds can be moved through a rollover. An account owner can perform a tax-free rollover from one QTP to another for the same beneficiary, often to seek better investment performance or lower fees. This type of rollover is limited to one per beneficiary in any 12-month period.
The SECURE 2.0 Act of 2022 introduced the option to roll over unused QTP funds into a Roth IRA for the beneficiary. This rollover is subject to strict conditions: the QTP account must have been maintained for at least 15 years, and any contributions being rolled over must have been in the account for more than five years.
The amount that can be rolled over is subject to the annual Roth IRA contribution limit for that year, which for 2025 is $7,000. There is also a lifetime maximum of $35,000 per beneficiary that can be moved from a QTP to a Roth IRA.