What federal tax advantages does the Utah Educational Savings Plan (UESP) offer?
Contributions to UESP accounts are not deductible for federal income tax purposes. However, earnings on investments in UESP accounts grow federally tax-deferred as long as the funds are used for qualified higher education expenses of the beneficiary at an eligible educational institution. Withdrawals from an account will generally not be subject to federal income tax. UESP funds used to pay qualified higher education expenses are free from federal income tax. There is no expiration date for tax-free withdrawals for qualified higher education expenses. Congress amended the law (Section 529 of the Internal Revenue Code of 1986) in August 2006, making this benefit permanent. Earnings used for non-qualified expenses are subject to federal income tax, plus an additional 10% federal penalty tax. The additional federal penalty tax will not apply to non-qualified withdrawals due to the beneficiary’s death, disability, scholarship, or attendance at a military academy.
