529 college savings plans, named after the section of the Internal Revenue Service (IRS) code that establishes the plans, are one of the nation's most advantageous ways of saving for higher education expenses. These qualified tuition plans allow federal tax-free withdrawal of earnings and possible tax deductions, which can help families to afford and pay for the rapidly increasing cost of college.
For the 2017 to 2018 school year, the cost of a year of school at a mid-priced college for an in-state student was approximately $25,000. A year of private school averaged almost twice that at $50,900. For students attending an out-of-state school, the cost rises even further. Therefore, it’s incumbent on families to try to save as much as possible as early as possible to get ahead of rising education costs.
One of the other primary benefits of 529 plans is their large contribution limits. Each state operates its own 529 plan and makes its own rules for the plan, so maximum contribution levels vary across states. Typically, contribution limits are high enough that most investors will never have to worry about hitting the ceiling, but those individuals considering attending a private university or Ivy League school could find themselves needing to save a significant amount of money to pay for college bills.
The Rules for Determining 529 Contribution Limits
To qualify as a 529 plan under federal rules, plan balances cannot exceed the expected cost of a beneficiary's qualified education expenses. The generally accepted guideline is that this limit constitutes five years of tuition, room and board at the most expensive college in the United States.
This guideline makes investment contribution limits quite large although every state is allowed to individually interpret what five years of qualified education costs means. Therefore, each state has a different contribution limit. Potential contributors should check with the state to determine specific investment maximums.
State-specific 529 Contribution Limits
Every state's 529 plan allows for maximum contributions of at least $200,000 per beneficiary. Georgia and Mississippi have the lowest maximum balance limits at $235,000 while states such as Washington DC, Idaho, Louisiana, Michigan and New Hampshire have lowest maximum limits of $500,000. New York's limit is $500 and Pennsylvania is $511. Once this point is reached, any contributions made to the account are not accepted and will be returned to the investor.
These contribution limits apply to each beneficiary. For example, in Georgia, which has a $235,000 maximum contribution limit, a set of parents contributing $200,000 for a beneficiary and a set of grandparents also contributing $200,000 to the same beneficiary would not be allowed.
Contribution maximums generally do not apply across states. An investor hitting the maximum in one state would likely be eligible to contribute further in another state's plan, but individuals should check with plan administrators first to make sure this is allowed.
Gift tax consequences may also need to be considered when making contributions to another person’s 529 account. Contributions of up to $14,000 per year can generally be made without any gift tax consequence. Contributions made by a grandparent, for example, into a grandchild's 529 account exceeding the annual $14,000 limit could trigger gift taxes. Individuals would be allowed to make a $70,000 one-time lump sum contribution with the understanding that it would cover five years' worth of gifts.
Who Can Contribute to a 529 Plan?
Anyone can contribute to a 529 plan account and can name anyone as a beneficiary. Parents, grandparents, aunts, uncles, stepparents, spouses and friends are all allowed to contribute on behalf of a beneficiary. While there are no income restrictions for the contributor, the maximum contribution limit applies to the beneficiary not the individual making the contribution. Balances designated for a specific beneficiary cannot exceed the maximum allowed by the state's 529 plan.