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Qualified Tuition Programs for Working Families

Qualified Tuition Programs (QTP) (formerly known as State Qualified Tuition Programs) began as a means to prepay or set aside funds for a college education. These are also known as 529 plans.

The cost of a higher education is undoubtedly on the rise- increasing at approximately 8% each year- that’s nearly three times the average rate of inflation.  With this factor in mind, it’s a wise decision to take every option available to you, especially those offering financial incentives, such as tax deferment.

There are basically two types of 529 plans- one that prepays and one that is a basic savings account . Both allow your money to grow tax deferred, and if the money is used for college education purposes, like books, tuition, and certain living expenses, the funds removed will not be subject to federal income tax or penalty.  The prepaid 529 plan allows you to purchase credits ahead of time from a list of state schools within the 529 program. Each individual state will have its own regulations regarding the program, so contacting an investment specialist -one that does not work on commission- is highly recommended. /p>

The savings account 529 plan allows you to put money into a tax deferred account for the sole purpose of paying for the future education costs of a child, grandchild, or other relative, referred to as the beneficiary.  This plan allows you much more flexibility than the prepaid, with many more college and university choices. The state decides which financial institution will manage your investment and future contributions on your behalf, as after the initial consultation, the owner can only change the investment strategy once annually. This type of 529 plan may also cross state lines, and pay for any secondary education institute that is approved for federal financial aid.

The Penalties

If you take money out of a 529 college savings plan that is not for college use, you will have to pay a penalty.  However, certain circumstances allow funds to be taken out without such a penalty.  They are:

  • The student (beneficiary) receives a scholarship to cover college expenses.  In this case, the withdrawn amount cannot exceed the scholarship amount.
  • The withdrawn funds are a result of the disability or death of the student (beneficiary).
  • The account funds are rolled over into a new 529 college savings plan that is a close relative of the first student/beneficiary.

Please note: Just because these types of withdrawals are penalty free, they are still subject to both federal and state income tax.

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