529 Plan Contribution Limits

by Cynthia Myers

Qualified tuition plans, commonly known as 529 plans, after the section of the Internal Revenue Service code that pertains to them, allow you to save money for college while paying no tax on the fund earnings. States sponsor 529 plans and allow you to either purchase credits toward tuition or to establish a fund in the name of a future student, with the intention that the fund will one day be used to pay for a college education. When establishing a 529 plan, you should keep certain contribution limits in mind.

Amount of Fund

Internal Revenue Service regulations state that the amount of money invested in a 529 plan can't exceed the cost of qualified expenses for the beneficiary. These expenses include tuition, fees, books and supplies, as well as room and board. The IRS has not set a maximum amount for a fund, because states administer 529 plans, but those states can set their own limits. Some states have established a limit of $200,000 as of publication. If you have a lot invested in a 529 plan, check with your state to determine if more contributions to the fund will exceed any state-mandated maximum.

Annual Contributions

The IRS treats the funds you set aside in a 529 plan as a gift to the plan beneficiary. In general, any gifts in excess of $13,000 in a calendar year are subject to a gift tax. You may be able to exempt your excess contributions from this gift tax by filing Form 709 -- United States Gift (and Generation-Skipping Transfer) Tax Return. This allows you to elect to spread out contributions in excess of $13,000 over a five-year period.

Other Gifts

Even if you keep your annual contributions to the 529 plan below $13,000, other cash gifts you give to the same beneficiary could be subject to gift taxes, because the IRS looks at the total you give to any one person in a year. If you regularly make cash gifts to your children or grandchildren, and also contribute to 529 plans for them, you'll need to keep careful records and consult your accountant.

Other Considerations

Money in a 529 plan may only be used to pay qualifying higher education expenses. If you or the plan beneficiary withdraw money for other purposes, such as to buy a car or make a down payment on a house, you could be subject to tax penalties. You can change the beneficiary of your plan without penalty, and you can roll over the funds in one plan into another plan. If, for instance, your grandson decides to forgo higher education, you could roll the funds you've accumulated for him into the fund you set up for your granddaughter, provided you did not exceed the state's maximum for a fund.

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