Qualified Tuition Program (QTP or 529) 

Updated: December 28, 2023
In this Article

    A Qualified Tuition Program (QTP) or more commonly referred to as a 529 plan, is a type of tax-advantaged savings account with the funds only permitted to be used on education expenses.

    In this article we will discuss the following:

    • Qualified Tuition Program (QTP) Overview
    • 529 Plan Option 1: Prepaid Tuition Plans
    • 529 Plan Option 2: Education Savings Plans
    • What Happens to Leftover 529 Plan Funds?
    • 529 Plans as Estate Planning Tools
    • Final Thoughts

    Qualified Tuition Program (QTP) Overview

    Overview and Tax Advantages

    To encourage saving for a child’s education, Congress authorized the Qualified Tuition Program (QTP). Most people refer to the QTP as a 529 plan, as Section 529 of the Internal Revenue Code defines the program. But, while the IRS authorizes this program, individual states administer 529 plans. Currently, all 50 states and Washington, DC offer their own 529 plans.

    Since its inception, the 529 plan has been updated several times. However, its core purpose remains the same: to provide people a tax-advantaged education savings plan. More precisely, these plans allow individuals to contribute money to education savings accounts on behalf of beneficiaries. These contributions then grow tax-free. As long as the money from a 529 plan is used to pay for qualified education expenses, neither the account holder nor the beneficiary needs to pay state or federal income taxes on these distributions. However, all distributions not used for qualified education expenses are subject to both income tax (on the earnings) and a 10% penalty.

    While 529 plans allow for tax-free growth, they do not provide any federal income tax deductions. In other words, if you contribute $5,000 to a child’s 529 plan, you cannot deduct that $5,000 from your taxable income at the federal level. However, some states allow for deductions up to a certain amount. For example, Virginia’s 529 plan allows account holders to deduct up to $4,000 per account per year on their state income tax returns (subject to certain restrictions). But, to take advantage of a state-level tax deduction, you must be a resident of that state.

    529 Contribution Limits 

    Unlike other tax-advantaged savings accounts, the IRS does not impose an annual contribution limit on 529 plans. Rather, states enforce their own maximum aggregate limits. In simple terms, this limit represents the expected maximum cost of a beneficiary’s qualified higher education expenses. Once a 529 account balance reaches this maximum, account holders cannot contribute any more money. The funds can still grow tax-free without any penalties, but individuals just can’t contribute more.

    Every state imposes its own maximum aggregate limits. They generally range from ~$235,000 to ~$529,000, depending on state-specific education cost projections.

    NOTE: While no 529 plan contribution limits technically exist, individuals will want to consider different tax and estate planning factors. We’ll discuss these considerations in detail in a later section.

    Who Can Open a 529 Plan?

    Often, a parent or guardian opens a 529 plan on behalf of a child shortly after birth. This allows parents to begin saving for education expenses at a young age. However, anyone can open one of these accounts. For instance, aunts and uncles, grandparents, and family friends can all open 529 plans on behalf of a child.

    Related, people can open 529 plans in any state, regardless of where they live. For instance, many USAA members use its 529 option, which is administered by Nevada. But, as discussed above, you can only receive a potential state-level tax deduction if you open a plan in your own state.

    529 Plan Types

    Two different types of 529 plans exist: 1) prepaid tuition plans, and 2) education savings plans. We’ll discuss both options in the next two sections.

    529 Plan Option 1: Prepaid Tuition Plans


    With these plans, account holders purchase units or credits at participating universities for future tuition and mandatory fees. But, here’s the advantage: you can buy these future credits at today’s prices. For parents concerned about dramatically increasing tuition costs, prepaid tuition plans allow you to lock-in tuition at today’s rates.

    Most of these plans are sponsored by state governments. But, not all colleges and universities participate (typically, only public, in-state schools do). Accordingly, if this option interests you, research A) what universities participate, and B) what residency requirements you must meet to qualify.

    Allowed Expenses

    As stated, a prepaid tuition plan allows you to prepay tuition and mandatory fees. But, these plans typically do not allow room and board prepayment. And, account holders cannot prepay tuition at elementary or secondary schools – only higher education.

    529 Plan Option 2: Education Savings Plans


    This is the more common 529 plan option. With education savings plans, individuals can open a tax-advantaged investment account to save for a beneficiary’s future education costs. Account holders can generally choose from a range of investment options, depending on the specific plan. Most states offer a variety of mutual funds, exchange-traded funds, money market funds, and target-date (i.e. automatically re-balancing) funds.

    Account beneficiaries can take education savings plan withdrawals tax-free so long as they use those funds for qualified education expenses.

    Allowed Expenses

    As with prepaid tuition plans, education savings plans can be used to pay for higher education tuition and fees. But, these accounts let beneficiaries use account proceeds at any US college or university (and select international ones, as well). Additionally, education savings plans proceeds can be used to pay for room and board.

    Education savings plans also offer far more flexibility when it comes to elementary and secondary education. Currently, funds from these plans can be used to pay up to $10,000 per year per beneficiary for tuition at any elementary or secondary school (public, private, or religious). But, account holders should also recognize that account contributions will have less time to grow tax-free if you withdraw them for elementary or secondary school rather than higher education.

    What Happens to Leftover 529 Plan Funds?

    As stated above, any 529 plan distributions not used for qualified education will be subject to income tax and a 10% penalty. This begs the question, what should I do with leftover 529 plan funds? In other words, if a beneficiary has completed school and money remains in the account, what options exist for the account holder?

    • Beneficiary transfer: Fortunately, 529 plans allow account holders to transfer beneficiaries to another family member. And, the term “family member” is broadly defined, which provides you significant flexibility in designating a new beneficiary.
    • Leave funds in the account for future education: Alternatively, you can leave funds in a 529 plan in case the beneficiary decides to go back to school in the future. For example, say $50,000 remains in a 529 plan after a beneficiary graduates from college. If he or she decides to go back to graduate school in the future, these leftover funds can be used for that tuition.
    • Withdraw and pay the taxes and penalty: Finally, account holders always have the option to withdraw their leftover 529 plan funds. In doing so, they’ll need to pay A) taxes on the earnings, and B) a 10% penalty.

    529 Plans as Estate Planning Tools

    We mentioned it above, but 529 plans – the education savings plan variants – can also serve as outstanding estate planning tools. Put simply, they can be a great way to pass wealth on to younger generations without paying taxes on those gifts.

    If someone dies with a certain net worth (an “estate”), the IRS taxes a large percentage of that wealth. Accordingly, many wealthy individuals take steps to minimize their taxable estates. The lower the estate, the lower the estate tax at death.

    Currently, the IRS allows individuals to give up to $17,000 per year ($34,000 per couple) to as many people as they’d like without incurring any gift taxes. And, 529 plans offer a way to accelerate these gifts with a lump-sum payment. Rather than contribute $15,000 per year to a 529 plan over five years, the IRS lets you make a single up-front payment, contributing $75,000 in the first year. Then, five years later, you can do the same thing.

    If a wealthy individual has six grandchildren, this means that he or she could reduce an estate by $450,000 in a single year (6 529 plans x $75,000/plan). Then five years later, he or she could make the same contribution, further reducing an estate – without paying any associated gift taxes!

    Final Thoughts

    The Qualified Tuition Program offers an incredible, tax-advantaged way to save for a child’s education. 529 plans are generally far more flexible than other savings options, and they can also serve as an outstanding estate planning tool.

    Written by Veteran.com Team