1. 529 Plans: Introduction
  2. 529 Plans: Types of Plans
  3. 529 Plans: Eligibility
  4. 529 Plans: Contributions
  5. 529 Plans: Distributions
  6. 529 Plans: Conclusion

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.Contributions are made with after-tax dollars. 

Contribution Limit

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 and thus are subject to federal gift tax. Starting in 2018, contributions of up to $15,000 can be made for each designated beneficiary without incurring federal gift tax in accordance with the annual exclusion applies to gifts to each donee. Alternatively (attention, wealthy grandparents!), an individual may be able to contribute a lump sum that covers five years, giving a total of $75,000 ($150,000 for married couples), provided the individual makes no additional gifts to that designated beneficiary for the five-year period. (For 2017, the limits are $14,000, $70,000 for five years and $140,000 for married couples.) Make this early in a child's life and compound interest will pay a good chunk of their college bill.

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.


529 Plans: Distributions
Related Articles
  1. Retirement

    Mistakes in Designating a Retirement Beneficiary

    Make sure your beneficiary designations not only reflect your intentions but also meet the requirements to be effective.
  2. Personal Finance

    529 Plan Contribution Limits in 2018

    Learn about the contribution and account balance limits on 529 plans and the difference in contribution limits among states.
  3. Retirement

    Distribution Rules For Inherited Retirement Plan Assets

    If you've recently inherited a retirement plan, you must get to know the rules for distributing the funds.
  4. Retirement

    Include Your Retirement Accounts in Your Estate

    Although they are often overlooked during estate planning, your retirement accounts are most likely one of the biggest assets you will leave your heirs.
  5. Financial Advisor

    Avoid This Life Insurance Policy Pitfall

    Life insurance policies need to be reviewed regularly to make sure that the beneficiary you chose some time ago is still the right choice today.
  6. Retirement

    A Look at Protecting Children With an IRA Trust

    Too many people make huge and irreversible mistakes when naming the beneficiaries for their retirement accounts.
  7. Managing Wealth

    Investing In Your Child's Education

    Overwhelmed by increasing tuition costs for your kids? The U.S. government can help.
Trading Center