J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

33.5 Contributing to a Qualified Tuition Program (Section 529 Plan)

Qualified tuition programs (QTPs), also known as Section 529 plans, allow you to either prepay a designated beneficiary’s future qualified higher education expenses or to establish a savings plan from which such expenses can be paid. States can sponsor savings plans and prepayment plans. Private colleges, universities, and vocational schools can set up prepayment plans only. Qualified higher education costs include tuition, fees, books, supplies, and eligible room and board costs. Distributions are generally tax free to the extent of qualified higher education expenses (33.6).

In a prepayment plan, a parent or other relative can purchase tuition credits or certificates as a prepayment of a child’s future college costs. Where the child will not start college for many years, prepaying tuition according to a set schedule can avoid higher inflation-based tuition costs down the road. In a state-sponsored savings plan, annual contributions are made to an account for the benefit of the designated beneficiary, earnings accumulate tax-free, and withdrawals can later be made to pay the beneficiary’s qualified higher education costs.

Contribution details and other plan terms including investment options can vary greatly from plan to plan. If you are considering an investment, you should contact the state or educational institution maintaining the plan for details.

Contributions are not deductible for federal tax purposes. ...