Chapter 8 - Income Tax Planning With QSTPs

The federal income tax benefits associated with a QSTP appear at first glance to be fairly straightforward. Although the contribution itself is not tax-deductible, the earnings on the account are tax-deferred until distributed in the future. The designated beneficiary is taxed on the earnings portion of a withdrawal used to pay for qualified higher education expenses, while the account owner is taxed if the withdrawal is made for any other purpose. In the typical scenario, having the earnings taxed to the beneficiary provides a significant tax savings because the student beneficiary is usually in a low tax bracket.