Chester contributed to a 529 plan and then withdrew funds for his daughter's tuition. What is a true statement regarding this action?

The statement that Chester does not have to pay tax on the distribution is accurate because qualified distributions from a 529 plan used for eligible education expenses, such as tuition, are tax-free at the federal level. This means that when Chester withdraws funds for his daughter's tuition, as long as the funds are used for qualified expenses, he will not incur any tax liabilities on the distributed amount.

In a 529 plan, contributions are made with after-tax dollars, so while the contributions themselves are not tax-deductible, the earnings grow tax-free, and withdrawals for qualified education costs, including tuition, are also free from federal taxation. This feature of tax-free growth and tax-free withdrawals when used for qualified expenses is a significant advantage of 529 plans, making them a tax-efficient way to save for education.

Understanding the tax implications of a 529 plan can help account holders like Chester effectively manage their education savings and avoid unnecessary tax burdens, reinforcing the importance of utilizing distributions for qualifying costs.