A 529 plan is the ideal way to save for college. It’s a tax-advantaged account that can help cover the cost of tuition, books, room and board, and other qualifying expenses. Compared to other college savings options, a 529 plan offers large contribution limits. Therefore, it’s no surprise that opening one is a common college saving tip

So what are 529 plan contribution limits? Since each state operates its own 529 plan, maximum contribution limits are not determined by the IRS. Instead, they vary across states. Let’s take a closer look at 529 contribution limits so you can figure out how much money you can allocate toward a college education for your child, grandchild, or anyone else in your life.  

529 Plan Aggregate Limits 

529 plans differ from 401(k)s and IRAs because there are no annual 529 plan contribution limits. However, there are maximum aggregate limits which vary by state. These limits apply to the total balances of all 529 plans in a specific state for the same beneficiary over the life of the accounts. The cost to attend an expensive four-year college and graduate school in each state help determine these limits. 

For 2020, the minimum limit of $235,000 per beneficiary is found in states like Georgia and Mississippi. North Dakota is also on the lower end with $269,000. Michigan, Idaho, Louisiana, South Carolina, Washington, and Washington DC offer high contribution limits of $500,000 per beneficiary. 

Some of the highest 529 plan contribution limits, however, can be found in Pennsylvania, New York, and California, where they are $511,758, $520,000, and $529,000 respectively. Once the combined 529 balances for a 529 plan reach the aggregate limit, additional contributions can not be made. The only exception to this rule is if a drop in the market brings the account balance back down. 

Keep in mind that the state you’re investing in, rather than the state you live in will dictate your 529 plan aggregate limit. Therefore, you may invest money in a high-limit state like New York, even if you live in a low-limit state such as North Dakota. Also, states often change their limits as college becomes more expensive so it’s important to review them on an annual basis. 

 

Gift Tax Issues 

Although a 529 plan can allow you to save multiple six figures for college, you may face a complication if you add funds too quickly. The “gift tax” limits how much money can transfer from one individual to another. 

While U.S.-citizen spouses are free to gift one another unlimited amounts, 529 plan contributions for a child, grandchild, niece, or friend may be considered gifts. Depending on their value, these gifts can impact your tax situation. 

In 2020, any monetary gift you make of up to $15,000 per individual makes you eligible for the annual gift tax exclusion. So if you and your spouse have two children, you can jointly give them $30,000 without having to worry about any gift-tax consequences. It’s important to note that the annual gift tax exclusion considers the total of all gifts, not just 529 plan contributions. For this reason, property gifts and cash must be included too. 

What happens if your total gifts are more than $15,000 per individual this year? The excess amount will apply toward your lifetime excess state and gift exemption. You’ll also have to report it on Form 709 at tax time. Fortunately, you won’t have to pay federal estate or gift tax unless you gift more than $11.58 million over your lifetime so this probably won’t be an issue. 

5-Year Election 

The 5-year election states that you can contribute up to $75,000 to a 529 plan as an individual if you treat the contribution as if it were spread over 5 years. You’re required to report the 5-year election on Form 709 for each of the 5 years. 

Let’s say, you open a 529 account, contribute $70,000 in 2020, and apply it as $14,000 per year. By front loading the plan, you can use compound interest to your advantage and allow the fund to earn more money over time. If you go this route, however, you won’t be able to contribute more money or take money out until the five year period is up. 

Once five years has passed, you’ll have the opportunity to contribute another $75,000 for the next five years if you’d like. If both you and your spouse decide to contribute, your total limit would be $150,000 for each five year period. This strategy can expedite your college savings goals and ensure all college-related expenses are covered when the time comes.

Closing Thoughts

While there are technically 529 plan contribution limits, it’s very difficult to reach them.  Even with the limits, 529 plans can make it easy for you to save a significant amount of money for college. Ready to open a 529 plan and start saving for your child’s college education? Download our easy-to-use app today! Our app makes the entire process a breeze!