Page 66 - BusinessWest October 31, 2022

Learning Exercise
What You Need to Know About Qualified Tuition Programs
By Charles Jacques
With the rising costs of higher edu- cation, it is even more important to effectively plan for how best to finance your future goals, regardless of what level you are at or pursuing.
Qualified tuition programs (QTPs), or 529 plans, are one possible route that not only sup- ports you in saving for education expenses, but also allows for tax incentives as established by the Internal Revenue Service (IRS).
What Is a 529 Plan?
Qualified tuition programs are established and maintained by either a state or educational institution (such as college or university) and are commonly referred to as 529 plans simply because their tax rules are governed by section 529 in the IRS code.
In short, these plans allow a taxpayer to either prepay or contribute to a savings or investment account that can appreciate in value over time, similar to a traditional IRA. When money from the account is later withdrawn by the designated beneficiary, the income will be excluded from federal income, provided, however, that these funds are being used for qualified educational expenses.
Common examples of qualified educational
expenses include tuition, fees, books, and even room and board at eligible educa- tional institutions (if at least a half-time student).
How Do I Start a 529 Plan?
These plans can be cre-
ated online or with the
assistance of an investment
advisor. Each state offers
plans, and if you already have a relationship with a brokerage firm (Edward Jones, Vanguard, Fidel- ity, etc.), you can also partner with your advisor to set one up. Do keep in mind that, while the distributions are excluded from federal income, tax consequences vary by state. Make sure to research the tax rules for your state before setting up the plan.
Are the Taxpayer Contributions Tax-deductible?
Contributions to a 529 plan are not deduct- ible for federal tax; however, some states do allow deductions. Be sure to check your state’s rules when setting up the plan.
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either prepay or contribute to a sav- ings or investment account that can appreciate in value over time, similar to a traditional IRA.
What If the Beneficiary Doesn’t Use the Money for Qualified Educational Expenses?
The intent of these plans was to provide tax incentives to fund higher education. Distribu- tions used for non-qualified expenses are gener- ally treated as income, and the earnings in the account will also be subject to an additional 10% penalty (with some exceptions). It’s important to verify that the intended expense qualifies before deciding to take the distribution.
Tuition
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These plans allow a taxpayer to
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66 OCTOBER 31, 2022
ACCOUNTING & TAX PLANNING
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