529 College Savings Plan Contribution Limits
Contributing to a 529 plan may seem quite simple — you write the check or get the money automatically withdrawn from your checking account, and those funds get deposited into the 529 plan.
Anyone can set up a Section 529 plan. In fact, the rules regarding who may contribute are so broad that you really need to consider only one major factor before you open a Section 529 plan: Make sure that you have a designated beneficiary (who already must have a Social Security number) in mind.
If, at a later date, your named beneficiary turns out to be a less than sterling student or decides to forgo higher education altogether, you may change your designated beneficiary through a tax-free rollover into a new account or just by changing the name of the designated beneficiary on the account. The new beneficiary, however, must be related to the original one.
In establishing Section 529 of the Internal Revenue Code, Congress and the IRS didn’t set express limits on how big these plans could be. They had a tacit understanding that higher educational expenses couldn’t be accurately gauged and that annual increases bore no relation to the rate of inflation or any other such economic measurement.
Before you consult your crystal ball regarding how much you think you should contribute, you need to take into consideration Gift and Generation-Skipping Transfer Tax issues and individual state contribution limits.
Section 529 plans were devised to allow all people, regardless of their annual income, to save very large sums for higher education expenses. Because there are no annual contribution limits, you may be tempted to sell the family farm and put all that cash into one or more plans.
The Generation-Skipping Transfer Tax (GSTT) regulations include one unique provision, applicable only to Section 529 plans. You may contribute up to five years’ worth of annual exclusion gifts in one year.
If you’re married, your spouse can do the same. Should you choose this option, you must file gift tax returns for each one of the five years, claiming your annual exclusion gifts. Furthermore, any additional gifts that you make in the five-year period are then subject to the gift tax or GSTT.
The federal government doesn’t impose any specific dollar limitation on the maximum contribution into Section 529 accounts for a specific beneficiary. But the code section is intentionally vague. And most plans are administered by the individual states: They have far more definite ideas as to the actual dollar amounts necessary to see your children through four years of college.
State-imposed contribution limits vary by state, and the state law that governs your account will be the state in whose plan(s) you are investing, not the state in which you live. Thus, you can invest money in a high-limit state, even if you live in a low-limit state. Also, be aware that states have the ability to change their limits (and often do), increasing them as tuition costs climb.
Contribution limits aren’t per account, but per designated beneficiary. Your designated beneficiary may have more than one Section 529 plan; however, the total amount in all plans in a particular state can’t exceed the limit for the state.