687 / What is a qualified tuition program (also known as a 529 plan)?
A qualified tuition program is a program established and maintained by a state (or agency or instrumentality thereof) or by one or more “eligible educational institutions” that meet certain requirements and under which a person may buy tuition credits or certificates on behalf of a designated beneficiary that entitle the beneficiary to a waiver or payment of qualified higher education expenses of the beneficiary (see below). These plans are often collectively referred to as “529 plans.” In the case of a state-sponsored qualified tuition program, a person may make contributions to an account established to fund the qualified higher education expenses of a designated beneficiary.2 Qualified tuition programs sponsored by “eligible educational institutions” (i.e., private colleges and universities) are not permitted to offer savings plans; these institutions may sponsor only pre-paid tuition programs.3
As a general rule, a qualified tuition program is exempt from federal income tax, except the tax on unrelated business income of charitable organizations imposed by IRC Section 511.4 See Q 689 for the tax treatment of distributions from qualified tuition programs. See Q 844 for the estate tax treatment and Q 902 for the gift tax treatment of qualified tuition programs.
To be treated as a qualified tuition program, a state program or privately sponsored program must:
(1) mandate that contributions and purchases be made in cash only;