What is a qualified tuition program?

Each state has its own qualified tuition program. These include the “529” plans–college saving plans and the prepaid plans. Many states allow tax deductions or tax credits for contributions to qualified tuition programs, such as 529 plans, though contributions to 529 plans are not deductible for federal tax purposes.

Withdrawals are tax-free provided they are used to pay qualified higher education expenses such as tuition, fees, books, supplies and equipment required for attendance, plus room and board. This only applies if the student is attending a qualified program at least half-time.

There are no income limitations imposed on the contributor or the beneficiary. Large contributions are permitted in most 529 plans. Most states allow nonresidents to contribute to the plans and most states allow the student to use college savings plan money to attend college out of state. However, a prepaid tuition plan typically will cover tuition only in-state; in some cases there is reciprocity among states, at least for certain courses of study. Otherwise, a prepaid tuition account can be drawn out and used for out of state expenses, typically with only a low rate of return credited.