The Ultimate Guide to 529 Contribution Limits

529 contribution limits are something that is not overly discussed. This is because most of the time families are not in a situation where they would reach the limits. However, things occur that could change that scenario.

You may of:

  • Received a significant increase at work causing you to have more disposable income.
  • If you’re a business owner and you have seen an increase in profits which then allows you to contribute more.
  • Come into an inheritance.

Whichever the case may be, it’s important to know about the 529 contribution limits. If you are unsure how a 529 college savings plan exactly works, then stop right here and head over to my previous post: 529 College Savings Plan Basics: The ABC’s.

Here are the ins and outs and some tips on how to approach if you happen to be nearing the contribution limits of your 529 plan.

Who Can Contribute to a 529 Plan?

So anyone can contribute to a 529 plan which is one of the benefits of opening and owning one.

Parents, grandparents, aunts, uncles, stepparents, spouses, and friends can all contribute on behalf of the beneficiary.

There are no income restrictions for the contributor. A maximum contribution limit applies to the beneficiary not to the person who makes the contribution.

How Much Can You Contribute?

A 529 college savings plan must abide to the federal rules and one of the rules is that a state program must not accept contributions in excess of the anticipated cost of the beneficiary’s qualified education expenses. State’s mean this in a broad sense where their limits reflect the cost of attending the most expensive schools in the country and including the cost of graduate school. This has led most states to have contribution limits of $300,000 and up.

Most states end up raising their limits to keep up with the rising college costs.

So if the contribution limit is $300,000, you cannot contribute more than that. Contributions usually do not cross state lines. Contributions made to one state’s 529 plan do not count towards the lifetime limit in another state. However, you want to always make sure you are checking the rules to see if your state takes contributions from other states’ plans into consideration when determining limits.

Annual 529 Contribution Limits

It makes sense for most families to try and take advantage of their tax-advantaged savings accounts and their college funds should be in that consideration. The IRS doesn’t specify annual contribution limits for 529 plans and as we have seen they offer high contribution limits.

Maximizing contributions

Even with 529 savings plans having the great tax-advantaged benefit, it can be challenging to time your contributions in an effort to minimize federal taxes.

If your state happens to offer a generous tax deduction for the contribution to its plan then during your “high-income” years it may make sense to contribute as much as possible.

Investing in your specific’s plan annual limit each year may help to maximize total contributions. Also, contributions of $14,000 or less does qualify you for annual federal gift tax exclusion.

You can then gift a lump sum of up to $70,000 and avoid the federal gift tax. This is provided you make an election to spread the gift evenly over five years.

529 College Savings Plan Contribution Rules

Rules, rules, and rules right? We talk so much about them and in the case of the 529 plan, they are important to know. Here are some basic rules that apply to the majority of 529 plans.

Cash Contributions Only

For 529 plans, only cash contributions are accepted.

Meanings, checks, money orders, and credit card payments. You cannot contribute stocks, bonds, mutual funds. If one has money tied up in assets and want to invest said money in a 529 plan, they must liquidate that first.

Change Investments Twice a Year

529 college savings plan usually offer several different investments portfolios to choose from. If you want to change your investment options then you can do so twice per calendar year for your existing contributions.

Factors Affecting 529 Contribution Limits

It’s attractive and tempting to contribute the maximum to a 529 college savings plan, there are factors to consider and most of them are centered on tax consequences for the account hold and other donors. Let’s check out some things to consider before making a large contribution to your 529 plan.

Earnings Accrual

Earnings accrual can contribute to your 529 plan limits. For example, if a state has a $300,000 contribution limit and you have contributed $250,000. If the plan then accrues $50,000, then the account maximum of $300,000 will be reached.  

529 Savings Plan Gift Tax

Donations that exceed the federal gift limit will be subject to a gift tax. Individuals can give an annual gift amount of up to $15,000 without paying taxes. If this exceeds $15,000 then they may be required to pay taxes on the gift amount. For married couples, this doubles therefore making the total amount be $30,000.

Five-Year Gift Tax

A five-year gift option also is in existence. This is where you can donate a lump-sum gift spread over five years and have the gift be tax free. So if your child’s grandparents want to contribute to their grandchild’s 529 plan, then each grandparent can contribute $75,000 for a total of $150,000 tax-free.

If this occurs though, it’s important to remember that you cannot gift any additional money to this person over the next five years without any tax consequences.

Lifetime Gift Tax Amount

Important thing to note is that if you contribute more than $15,000 in one year (or $75,000 over 5 years) it’s not necessarily true that you have to pay a gift tax.

Gifts that surpass the annual exclusion amounts will have to be report on Federal Tax Form 709.

These will end up being counted against the $11.4 million lifetime gift tax exclusion. Amounts that exceed that could also trigger gift taxes up to 40%. Individuals within the $11.4 million limit will not be subject to the gift taxes.

State-Specific Contribution Limits

When opening a 529 plan, it’s important to know the state-specific contribution limits. Let’s review the quick points of state-specific contribution limits that you need to be aware of:

  • Every state’s 529 plan allows for maximum contributions of at least $235,000 per beneficiary. Georgia, Mississippi, and Tennessee have the lowest maximum balance limits at $235,000
  • North Dakota has a limit of $269,000.
  • Sates such as Idaho, Louisiana, Michigan, New Hampshire, South Carolina. Washington state, and Washington DC have maximum limits of $500,000.
  • The Pennsylvania limit is $511,758.
  • The New York’s limit is $520,000.
  • California’s limit is $529,000.

Once this point is reached, any contributions made to the account are not accepted and will be returned to the investor.

529 Plan Aggregate Limits

Although having no annual contribution limits, there are maximum aggregate limits which vary by plan. The federal law states that for 529 plans, balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses.

Limits will vary by state but the ranging is going to be on the low side $235,000 to $529,000 on the high side. These mounts are what the states believe are the full cost of attending school and includes textbooks and room and board.

If one happens to be close to the limit and the fund’s earnings end up pushing the amount past the limit, then the funds can remain in the account without any penalty. The family won’t be able to make any future contributions through unless a market drop brings the account balance back down.

Lump-Sum vs Periodic Contributions

I’ve had many conversations with family members and peers about If it’s better to fund the 529 plan on a consistent and gradual method or with a lump sum.

Most (including myself) would think that the lump sum approach would be better because the plan’s earnings will then grow tax deferred the soon money is in it and that also means the sooner your earnings can grow.

The lump sum approach may also save you fees over time.

However, the lump sum method may also bring unwanted gift tax consequences. Also, you are limited with your opportunities to change an investment portfolio.

Periodic investing will allow you to direct future contributions to other available portfolios in the plan.

Alternatives if Limits are Exceeded?

If your 529 has exceeded its limit then there are alternatives that are out there for you. Say your child’s Grandparents wants to make a contribution but the limits have been reached. Or again you are in your high income earning years and want to contribute.

Those parties can make tuition payments to the college directly and those payments are not considered a taxable gift. They may not affect financial aid however, so if that does happen then it’s best to do it senior year when financial aid may not be a factor.

Can you Have Multiple 529 plans?

Some parents fund multiple 529 College Savings Plan. It may be in the same state or different states. Certain plans may factor 529 Savings Plan contributions in other states. So it’s vital to discuss this with a plan administrator as you approach plan maximums.

Consult with a Professional

In the end, it’s best to consult with a professional. Regardless of if you decide to use their services or not, a conversation with a professional may answer some of those questions and give you enough information needed to make a sound decision.

I’d love to hear your feedback on your experience with 529 contribution limits.

That’s all for today.

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