What Is a Qualified Tuition Program (529 Plan)?

A Qualified Tuition Program (QTP), or 529 plan, is a tax-advantaged savings program designed to help families set aside funds for education costs. Established by states or educational institutions, these plans allow you to prepay a student’s tuition or contribute to a savings account for various educational expenses.

While contributions are not federally deductible, the money grows tax-deferred. Withdrawals for approved educational costs are tax-free, allowing savings to compound more effectively.

Types of Qualified Tuition Programs

There are two kinds of Qualified Tuition Programs, each with a different approach to saving. The first is the prepaid tuition plan, which allows a contributor to purchase tuition credits at today’s prices for future use at eligible colleges and universities. This model locks in current tuition rates, providing a hedge against rising education costs.

Most prepaid tuition plans are sponsored by state governments and often require that the account owner or beneficiary be a resident of that state. These plans may have specific enrollment periods and age or grade limits for the beneficiary. While designed for in-state public institutions, many plans allow the value of the credits to be used at private or out-of-state schools, though the direct tuition guarantee may not apply.

The more common type of QTP is the college savings plan. These plans function like an investment account where contributions are invested in various portfolios. The account’s value fluctuates with market performance, meaning there is potential for growth as well as risk of loss. Funds in a college savings plan can be used at any accredited postsecondary institution in the country and some abroad.

Coverdell Education Savings Accounts (ESAs) also offer tax advantages for education savings but are not QTPs. They operate under different rules, including much lower annual contribution limits, making 529 plans a more flexible option for many families.

Funding and Growing Your Plan

There are no federal annual contribution limits for 529 plans; however, contributions are considered gifts for tax purposes. This means they are subject to the annual federal gift tax exclusion, which is $19,000 per donor, per beneficiary in 2025. A married couple can jointly give up to $38,000 per beneficiary without gift-tax consequences.

A unique feature of 529 plans is the ability to “superfund” an account by making five years’ worth of gifts in a single year. This allows a lump-sum contribution of up to $95,000 per individual in 2025 without triggering the gift tax. To do this, the contributor must file a gift tax return (IRS Form 709) to make the five-year election.

While the federal government does not set annual limits, each state sets its own aggregate contribution limit for its plans. These limits, ranging from $235,000 to over $500,000, represent the total amount that can be in a beneficiary’s account. Contributions cannot be made once the account balance reaches this state-mandated maximum.

The earnings generated from investments within the 529 account are not subject to federal income tax each year. This tax-deferred growth allows the account to grow more rapidly than a taxable investment account, where earnings would be reduced by annual taxes.

Using Program Funds for Qualified Expenses

Funds from a QTP can be used for a broad range of qualified education expenses at an eligible postsecondary institution. This includes any college, university, or vocational school eligible to participate in a student aid program administered by the U.S. Department of Education.

Qualified higher education expenses include:

• Tuition and mandatory fees
• Books, supplies, and required equipment
• Room and board for students enrolled at least half-time. The amount is limited to the school’s official cost of attendance allowance or the actual amount charged for university-owned housing.
• A computer, peripheral equipment, software, and internet access for the beneficiary

The definition of qualified expenses has expanded beyond higher education. Account owners can withdraw up to $10,000 per beneficiary, per year, to pay for tuition at an elementary or secondary public, private, or religious school (K-12).

Use of 529 plan funds also extends to workforce development. Expenses for fees, books, supplies, and equipment for participation in an apprenticeship program registered under the National Apprenticeship Act are qualified. Additionally, a lifetime limit of $10,000 can be withdrawn to repay qualified student loans for the beneficiary or their sibling.

Tax Treatment of Distributions

The tax implications of withdrawing money from a 529 plan depend on how the funds are used. When a distribution pays for qualified education expenses, the withdrawal is completely tax-free at the federal level. The account administrator will issue Form 1099-Q, Payments From Qualified Education Programs, to the recipient to report the withdrawal to the IRS.

If a withdrawal is used for anything other than a qualified expense, it is a non-qualified distribution. The portion of the distribution that represents original contributions is returned tax-free. However, the portion attributable to investment earnings is subject to both ordinary income tax and an additional 10% federal tax penalty.

The earnings portion of a non-qualified distribution is calculated pro-rata. For example, if a $50,000 account consists of $30,000 in contributions and $20,000 in earnings, then earnings represent 40% of the value. If a non-qualified withdrawal of $10,000 is taken, 40% of that withdrawal, or $4,000, is considered taxable earnings.

This $4,000 would be reported as ordinary income and would also be subject to the 10% penalty, resulting in an additional $400 tax. The recipient of the funds is responsible for paying the taxes and penalties. Some states may also “recapture” tax benefits by requiring repayment if a non-qualified withdrawal is made.

Rollovers and Plan Changes

An account owner can change the beneficiary to another qualifying family member of the original beneficiary at any time, tax-free. Qualifying family members include:

• Siblings and step-siblings
• Parents, step-parents, and ancestors
• Children, step-children, and their descendants
• Nieces and nephews
• Aunts and uncles
• First cousins
• The spouse of the beneficiary or the spouse of any of the above relatives

Funds can be moved from one 529 plan to another for the same beneficiary through a tax-free rollover, which is limited to once in any 12-month period. Funds can also be rolled over to a 529 plan for a new beneficiary who is a qualifying family member of the old one.

In certain situations, funds can be rolled over from a 529 plan to an ABLE account for the same beneficiary or a qualifying family member. This rollover is permitted as long as the total amount, combined with other contributions to the ABLE account, does not exceed the annual ABLE contribution limit.

The SECURE 2.0 Act allows for tax- and penalty-free rollovers from a long-term 529 plan to a Roth IRA for the beneficiary, subject to several conditions. The 529 account must have been maintained for at least 15 years, and the funds being rolled over must have been in the account for at least five years. The amount rolled over is subject to the annual Roth IRA contribution limit and a lifetime maximum of $35,000 per beneficiary.