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What are the Contribution Limits For My 529 Plan?

As the cost of higher education continues to climb, saving for your child's college education, or even for a grandchild or another relative, can seem like a daunting task. One of the most popular strategies is to use a 529 plan, a tax-advantaged savings plan designed to encourage saving for future education costs. However, knowing the contribution limits and financial strategies can make a significant difference in how efficiently you use this tool.

Understanding the 529 Plan Contribution Limits

Contributions to 529 plans are subject to various limits. At the core is the annual gift tax exclusion amount. In 2016, this limit was $14,000 per beneficiary. The unique aspect of 529 plans, however, is the ability to accelerate these contributions. A 529 plan owner can contribute up to $70,000 at once, but the caveat is that no additional contributions can be made for the next five years.

When it comes to married couples, each spouse can contribute, enabling parents to deposit up to $140,000 into a 529 plan in a single year. Keep in mind that the cumulative balance in the 529 plan is subject to limits set by each state, which usually cap it around the amount needed to fund a college education and a master's degree, roughly seven years of expenses. These limits can range from $250,000 to over $400,000.

If you reach the cap for a state's allowed account balance, you can fund another state's 529 plan. Also, if the named beneficiary won't be utilizing the entire account balance, the beneficiary can be changed, providing flexibility in terms of who can use the funds for their education.

Understanding the 529 Plan and IRA Interactions

It's tempting to think about rolling funds from a Traditional IRA into a 529 plan, particularly if you have a substantial balance in your IRA. However, this strategy is not as beneficial as it might seem initially. Any money moved from a Traditional IRA into a 529 plan will be subject to taxes. Furthermore, you might end up paying a penalty if you transfer money from your IRA to a 529 plan.

More sensible options might include taking an IRA distribution specifically to pay for education expenses or funding a 529 plan with regular income or other assets. On the other hand, a Roth IRA can be a more flexible tool to save for both retirement and college costs. The major downside to withdrawing from a Roth IRA for a 529 plan is the forfeiture of tax-deferred space, which could affect your retirement savings significantly.

While 529 plans offer an excellent avenue to save for higher education, understanding the intricacies of contribution limits and potential interactions with other investment vehicles such as IRAs is crucial. To navigate these complex financial waters successfully, it's essential to weigh your options carefully and consider the tax implications of each strategy.

Parents and family members, or actually anyone, can contribute up to the annual gift tax exclusion limits, and beyond. Several people can fund 529 plans for the same person or child, and any one person can maintain as many 529 plans as they would like.

Each person can contribute up to the annual gift tax exclusion amount, which in 2016 is $14,000, per beneficiary. 529 plans have a special provision that allows the owner of the account to exceed the gift tax exclusion by contributing up to $70,000 at once – but no contributions can be made for 5 years after that, because this provision is really just allowing you to accelerate the contributions.

A spouse in a married couple can also contribute, so parents could hypothetically put $140,000 into a 529 plan in one year. As the account accumulates, you may approach total balance limit, which is different for each state. States tend to cap it around the amount it would cost to fund college and a master’s degree, or 7 years of expenses, generally. It can range from $250,000 to upwards of $400,000.

Once you have capped out a state’s allowed account balance, you may be able to fund another state’s 529, if desired, but it is also worth noting that if you have an account which names one beneficiary, you can change the beneficiary if you choose, or if the beneficiary won’t be using up the account balance, but a sibling will need it for medical school.

Will Having a 529 Plan for My Child Impact His/Her Eligibility For Financial Aid in the Future?
What is the Federal Supplemental Education Opportunity Grant?

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