Regular contributions to 529 plans must be made in cash (which includes checks). In-kind contributions, such as stocks, bonds, mutual funds or other non-cash items cannot be used to make regular contributions to and cannot be made in the form of securities.
The maximum amount that may be contributed on behalf of each designated beneficiary varies among states. Typically, contributions to each plan are limited to amounts that are necessary to finance the designated beneficiary's eligible education expenses. Where limits are established, they are usually applied on a lifetime basis. For instance, a plan may limit total contributions to $200,000, which would be the maximum total that can be contributed to the designated beneficiary's 529 account over time.
Amounts contributed to a designated beneficiary's 529 account are treated as a gift. However, contributions of up to $14,000 can be made for each designated beneficiary without incurring federal gift tax in accordance with the annual exclusion applies to gifts to each done. Alternatively, an individual may be able to contribute a lump sum that covers five years, giving a total of $70,000 ($140,000 for married couples), provided the individual makes no additional gifts to that designated beneficiary for the five-year period.
Care must be taken to ensure contributions do not exceed amounts necessary to cover eligible expenses, as the earnings portion of distributions not used to cover such expenses may be subject to income tax and early distribution penalties.
Rollovers, Transfers, Changing Designated Beneficiaries
If a designated beneficiary no longer wants or needs the balance in his or her 529 plan, the amount can be given to an eligible family member. For this purpose, eligible family members include the following:
- The designated beneficiary's spouse
- The designated beneficiary's son or daughter or descendant of the beneficiary's son or daughter
- The designated beneficiary's stepson or stepdaughter
- The designated beneficiary's brother, sister, stepbrother or stepsister
- The designated beneficiary's father or mother, or ancestor of either parent
- The designated beneficiary's stepfather or stepmother
- The designated beneficiary's niece or nephew
- The designated beneficiary's aunt or uncle
- The spouse of any individual listed above, including the beneficiary's son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
- Any individual for whom the home of the designated beneficiary is his or her primary home for the entire tax year
- The designated beneficiary's first cousin
The amount can be moved to an eligible family member as a rollover, transfer or by changing the name and tax identification number on the account to that of the new designated beneficiary. If the rollover method is used, the rollover must be completed within 60 days of the amount being distributed from the plan.
Tax Deduction Allowance
Some states' 529 plan rules allow taxpayers to receive a tax deduction for contributions, but there may be certain requirements. For instance, while a state's 529 plan may allow anyone (regardless of his or her state of residence) to participant in its 529 plan, only residents of the state may be allowed a tax deduction for the contributions. Individuals must check with the particular plan to determine its features and benefits.
Permissible Investments in 529 Plans
The investment choices for 529 plans are usually limited to mutual funds or annuities. For some plans, the investment choices are based on the age of the beneficiary, allowing more aggressive investments for younger beneficiaries.
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