How QTPs Work: Contributions, Investments, and Distributions
Understanding how to fund, invest, and spend from a 529 plan can make all the difference in your college
planning strategy.
Welcome back to our weekly series on Qualified Tuition Plans (QTPs). Last week, we explored the differences between prepaid and college savings plans. Today, we're taking it a step further and showing you how to make these plans work smarter for your family—starting with contributions, navigating investment options, and understanding how distributions are handled.
Contributions: Start Smart, Grow Smart
A QTP can receive contributions from anyone—parents, grandparents, rich uncles, and even generous neighbors. While there’s no annual federal contribution limit, contributions must not exceed the amount necessary to cover the beneficiary’s future education expenses (each state sets this cap).
You can combine the annual gift tax exclusion ($18,000 per person in 2024) across five years and make a lump-sum contribution up to $90,000 per beneficiary without incurring gift tax. This is a great way for grandparents to supercharge a college fund early on.
Pro Tip: That lump-sum option is called "superfunding." You must file a gift tax return to spread it over five years, but you won’t owe tax unless you exceed your lifetime exclusion.
Investing: Choose a Path That Matches Your Timeline
When setting up a QTP, you'll choose from a menu of pre-set investment portfolios offered by the state plan. You can't pick individual stocks, but you can select an approach that fits your risk tolerance and your child’s age.
Common options include:
Age-based portfolios that become more conservative as the beneficiary approaches college.
Static portfolios that maintain a fixed asset mix (e.g., 80/20 stock/bond).
FDIC-insured savings options for families seeking safety over growth.
Pro Tip: A longer runway to college? Consider a more aggressive mix. But as move-in day approaches, shifting toward conservative allocations helps preserve your savings.
Distributions: Tax-Free If You Follow the Rules
QTP distributions used for qualified education expenses are federally tax-free. These include:
Tuition and fees
Required books and supplies
Room and board (if the student is at least half-time)
Computers and software used for school
The QTP custodian will issue a Form 1099-Q showing the total distribution and how it breaks down between your original contributions (called "basis") and earnings. Only earnings used for non-qualified expenses are taxable—plus a 10% penalty.
Pro Tip: If you're unsure about whether an expense qualifies, ask before withdrawing. Non-qualified expenses could turn into an expensive mistake.
Financial Aid Effects: Better Than You Think
QTPs owned by a parent are considered a parent asset for FAFSA purposes. That means they’re assessed at a maximum of 5.64% for aid eligibility. Compare that to student-owned assets, which can be assessed at up to 20%.
Bonus: Withdrawals from QTPs used for qualified expenses don’t count as income on the FAFSA, keeping your aid eligibility intact.
Want help reviewing your current 529 or QTP plan? Or need help deciding which portfolio to choose? Let's chat.
Schedule a FREE Getting Acquainted Call today and let’s make sure your education savings are working as hard as you are.
Warm regards,
Julie Bray
Your Family's College and Retirement Champion
GW Financial, Inc.
This post is part of our QTP blog series. Stay tuned next week as we explore the tax implications of these plans—plus an example to bring it all together.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by GW Financial, Inc. to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2025 GW Financial, Inc.
