A 529 college savings plan is an excellent option for financing future education costs. It also offers serious tax benefits. Legally referred to as “qualified tuition plans,” these tax-advantaged savings plans are generally sponsored by states, educational institutions, or state agencies. They are authorized by Section 529 of the Internal Revenue Code. Nearly every state in the U.S. now offers at least one type of 529 savings plan, including Virginia and Maryland. Contribution limits on 529 college savings plans are set by states and can sour as high as $380,000 (Source: Navy Federal Credit Union).
529 College Savings Plan Contribution Limits
Going to college can be a good investment as higher education often leads to higher income. However, universities are expensive and the cost to attend is continually rising. Even with scholarships and alternative assistance programs, there may not be enough to cover the cost of tuition, materials, and housing.
That is where 529 college savings plans can be extremely useful. These types of plans allow your money to grow tax-free which certainly has its advantages. In addition, the IRA does not specify a dollar amount for annual contribution limits to 529 plans. However, there are certain rules that you abide by to ensure that you are following all relevant tax laws.
The IRA does not set limits on how much you can contribute annually to 529 college savings plans. However, as these plans are state-sponsored, each state sets limits on how much you can accumulate.
Most families do their best to maximize their tax-advantaged savings accounts. Those saving for retirements are allowed to contribute up to $18,500 in an employer-sponsored 401(k) account or up to $5,500 to an IRA account (or up to $6,500 if you are over age 50) (Source: Lobosco).
It gets a little trickier when it comes to 529 plans. While most people do not come close to the high limits set by their state, you should still be aware of your state’s contribution limits. Most states limit account balances to the expected cost of higher education at any eligible institution. When calculating costs, states may consider:
- Tuition and related fees
- Computers used for schooling
- Room and board
- Textbooks and other required supplies
- Graduate school
The costs relating to higher education can quickly build. Most states understand the rising costs of college and therefore set exceptionally high limits. In Virginia, the total contribution limit is set at $500,000 for a single beneficiary. In Maryland, the total contribution limit is $350,000 (Source: Simon).
529 College Savings Plan Gift Tax Exclusions
One of several key benefits of saving money in a 529 plan is that your contributions are considered gifts in regards to taxes. In 2018, any gifts that total up to $15,000 per person will qualify for the annual exclusion. This number increased from $14,000 in 2017. For each person you choose to give a gift to, you can give $15,000 and your spouse can give an additional $15,000 without having to pay gift taxes. This total should also include any cash or property gifts. (Source: Ebeling)
Things work a little differently if you choose to gift money to your spouse. If both spouses are U.S. citizens, they can gift each other an unlimited amount. Contribution limits only pertain to children, grandchildren, or other individuals. If your total gifts to a single person exceed the $15,000 limit, the excess amount contributed has to be reported on Form 709 when filing taxes. (Source: Internal Revenue Service) Joint gift-tax returns do not exist, meaning you and your spouse will need to file separately. Know that when you give a gift it could affect your current or your future taxes.
Contributions to a 529 college savings plan may be subject to gift taxes under certain circumstances. If a contribution goes above the yearly gift tax exclusion, an average of five-years gift tax would then apply. This averaging means that the contribution will be seen as having been made over a period of five years starting with the current year. Other possible consequences that can occur relate to earnings that are withdrawn for non-qualified expenses. These types of expenses are subject to a 10 percent penalty, in addition to the cost of income taxes (Source: Flynn).
Learn More About 529 Plan Contributions
Contributing to 529 college savings plans can be a smart option for many families. Unlike many other types of college savings programs, a 529 plan allows the account holder to maintain ownership of the funds. This also means that the account holder can withdraw funds at any time. However, withdrawal may result in certain penalties and taxes. The beneficiary has no control over the funds while they are still in the account.
Still not sure if a 529 college savings plan is right for you? Contact the financial consultants at IFG today to learn more about 529 college savings plans and how they can help you build for the future.