529 Contribution Limits

One of the most powerful college savings vehicles is the 529 college savings plan. Your money grows tax-free in those programs as long as you follow all of the relevant tax laws, and they allow you to make significant contributions. There is no maximum annual 529 contribution limit, but there are other factors to keep in mind as you decide how much to save in a 529.

The IRS does not set limits on how much you can contribute to a 529 plan. As state-sponsored programs, each state sets limits on how much you can accumulate. Fortunately for most savers, those maximum limits are the least of your worries — most people won’t ever come close. To find the maximum allowed amount in any state, get a current copy of that state’s disclosure booklet.

Contributions to a 529 might not qualify a federal income tax deduction, but that’s not to say there are no federal benefits. Earnings inside of a 529 are not taxed annually, and all of the earnings can potentially come out tax-free if you use the money for qualified higher education expenses. Of course, if you don’t use the funds for qualified expenses, you risk paying income tax and penalty taxes on the earnings.

Qualified higher education costs can include:

  • Tuition and fees
  • Room and board
  • Textbooks
  • Computers used for school
  • Graduate school (for another round of the expenses above)

You can save a lot of money in a 529 plan, but there may be complications if you add funds too quickly. The “gift tax” limits how much you can give to somebody else before the IRS gets involved. Spouses who are both U.S. citizens can give each other an unlimited amount, but things change when you start making contributions to a 529 plan for a child, grandchild, or another individual. Those contributions might be considered gifts, and those gifts can affect your current or future taxes. Individuals are allowed to gift a certain amount each year before triggering gift tax issues. That amount, known as the annual exclusion was $15,000 in 2018 that amount applies to the individual making the gift — not the recipient — so a married couple that files a joint tax return could potentially give up to $30,000 without triggering gift tax issues. You’re free to gift more than $15,000 to the same person in one year. However, you’ll need to report the gift to the IRS on Form 709, which isn’t as bad as it sounds. You won’t necessarily need to pay taxes on the gift — it can potentially apply to your lifetime exclusion.

For 529 contributions, the IRS allows you to make five years’ worth of contributions at once — with the potential to avoid gift tax consequences. An individual could contribute $75,000 (or $150,000 for a married couple) to a beneficiary’s 529 in one lump sum, but you’ll need to use Form 709 to take the five-year election. If you make payments directly to a higher education institution for tuition expenses, those payments are generally not subject to gift taxes.

Another limit worth knowing about is the extent to which you get current-year tax benefits. In some states, you may be eligible for a state income tax deduction if you contribute to your home state’s 529 plan. State tax deductions usually aren’t as generous as federal income tax deductions, but every dollar counts when you’re raising a child and planning for the future.

January 26, 2018 12:00 pm

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