529 Contribution Limits

Contribution and Other Notable Limits

College girl working in notebook
••• Getty Images

Higher education often leads to a higher income, especially with the right college major or graduate degree. It's a worthy investment, but school is expensive, and costs are rising. If scholarships aren’t in the cards (and even if they are), it’s a good idea to save money for education early and often. You might even get some help on your taxes.

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.

Maximum Contribution Limits

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. But if you’re fortunate enough to have significant assets available, it’s worth checking with your state (or the state hosting your 529 accounts, if different).

States limit total account balances (not annual contributions) to the total expected cost of higher education at eligible institutions. Costs can include:

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

Those costs can add up, so the maximum limits are accordingly high. For example, in New York, you can make contributions until the beneficiary has $375,000 in New York 529 assets. After that, the account can continue to grow (through interest earnings, for example), but new contributions would not be allowed unless the limit is raised. Other states have similarly high limits. California sets the maximum at $475,000, and Michigan allows up to $500,000.

To find the maximum allowed amount in any state, get a current copy of that state’s disclosure booklet. Those numbers change from time to time, so always verify for yourself before you make any decisions about your money. Remember that the maximum limit is just one of many factors that should determine which 529 program you use. Especially if your home state offers tax benefits for making contributions, you need to evaluate the pros and cons of going out of state and giving up a deduction.

Gift Tax Issues

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.

Annual exclusion: Individuals are allowed to gift a certain amount each year before triggering gift tax issues. That amount, known as the annual exclusion was $14,000 in 2017 (although 529 plans enjoy unique benefits described below). 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 $28,000 without triggering gift tax issues. For example, assume the couple wants to contribute as much as possible to their child’s 529 account without gift tax implications.

Each spouse (acting as an individual) can contribute up to $14,000.

Giving more than the maximum? You’re free to gift more than $14,000 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.

Five-year election: 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 $70,000 (or $140,000 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. That’s a powerful way to jump-start a savings plan. However, the rules can be complicated, and it’s easy to accidentally “overlap” gifts and give too much. You’re using the next five years’ worth of exclusions, so additional gifts in those years may have tax consequences.

Also, if the individual who made the contribution dies within that 5-year period, their estate may need to count a portion of the contribution for estate tax purposes (known as “recapture”).

Direct payments: If you make payments directly to a higher education institution for tuition expenses, those payments are generally not subject to gift taxes. That’s not much help if you’re socking away money for a newborn, but it could be helpful for parents or grandparents helping out while a child is in school. This strategy isn’t perfect — it’s useful for tuition payments only. Money for room and board or other expenses may be treated as a gift. Also, it may affect the student’s ability to get financial aid.

Limits on Deductions

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.

The primary goal of a 529 account is probably to build assets for future expenses (not get a state tax deduction), so you may not care what the limits are. However, it’s always good to know how much you can benefit from making contributions — and you don’t want to claim a deduction that you’re not allowed to claim.

For example, New York state taxpayers using a New York 529 plan may be able to deduct up to $5,000 (or $10,000 for married couples filing jointly) on their state tax returns. Illinois doubles those amounts (a married couple can deduct up to $20,000), and some states allow you to deduct the full amount of your contributions. To complicate matters further, some states base the limit on the taxpayer claiming the deduction, while others apply separate limits for each beneficiary (contributing to multiple beneficiaries could provide a higher total deduction).

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.

Important Information

This page offers a general overview of complicated tax topics and state-run programs — but it is no substitute for professional advice. Before you make big decisions or take action with your money, please consult with a local tax advisor and a financial planner familiar with the rules in your state. The information on this page may be inaccurate or may not apply to your individual circumstances. It’s always better to prevent problems before they happen (by consulting with an expert) than to fix them.

The information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.