Here's how the IRS defines qualified tuition programs :
"A Qualified Tuition Program (QTP), also referred to as a section 529 plan, is a program established and maintained by a state, or an agency or instrumentality of a state, that allows a contributor either to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses. Eligible educational institutions can also establish and maintain QTPs but only to allow prepaying a beneficiary's qualified higher education expenses."
In simple words, qualified tuition programs allow you to save money for your child's college education. There are two options that you can choose from:
1. Prepaid tuition plans: Eligibile institutions or group of institutions allow you to prepay college expenses. In case your child chooses a private college, he will still receive the benefits of the plan.
2. 529 Savings plan: Under 529 savings plan, you can contribute to the plan, and its principal as well as interest will fund your child’s/grandchild’s education.
You can open more than one 529 plan, and make sure to choose a state with higher contribution limits, as they vary throughout the US.
Taxation of 529 Contributions
For tax calculations, these contributions are taxed as gifts, and hence enjoy the annual tax-free limit of $14,000. It means you can contribute up to $14,000 annually to your child’s/grandchild’s 529 plan, and any contributions after that will incur gift taxes. A married couple can make separate contributions of up to $14,000 each, contributing $28,000 annually.
As far as contributions to a 529 plan are concerned, any individual including parents, grandparents, uncles, aunts, relative, and even friends can contribute to a beneficiary’s 529 plan, although the contributions are to be made within the allowed limit pertaining to the beneficiary.
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