How much can you contribute to a 529 plan in 2020? - Saving for College (2024)

FAQs

Can I contribute lump sum to 529? ›

Superfunding a 529 Plan Account

It allows a gift giver to make a lump sum contribution of up to five times the annual gift tax exclusion and spread it over five years. 20 This means that for 2022, you can contribute up to $80,000 to a 529 account.

If your child is in college, there is no limit for 529 amount withdrawals. The only requirement is for the withdrawals to be used for qualified expenses. If you're paying for private school expenses for younger children, you can withdraw up to $10,000 tax-free for qualified education expenses for children between K-12.

The 5-Year Election

Individuals may contribute as much as $85,000 to a 529 plan in 2023 ($80,000 in 2022) if they treat the contribution as if it were spread over a 5-year period. The 5-year election must be reported on Form 709 for each of the five years.

The rollovers can only begin if the money has been in a 529 for at least 15 years. The amount is also subject to annual Roth IRA limits. The contribution limit for 2023 is set at $6,500, with an extra $1,000 catch-up allowance for people over 50.

With a 529 plan, you can build an educational legacy for your grandchild while taking advantage of tax and estate planning benefits. The new FAFSA is being released over the next two years which provides a 529 grandparent loophole where the contributions won't count against a grandchild's ability to get financial aid.

Annual 529 plan contribution limits

529 plans do not have annual contribution limits. However, contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2023 up to $17,000 per donor ($16,000 in 2022), per beneficiary qualifies for the annual gift tax exclusion.

You can also pay for groceries and utilities, always up to the cap of the cost of attendance. Make sure you keep a record of all your purchases and keep receipts for everything you want to count as a 529 disbursem*nt – this is essential for your tax return.

You can use your 529 plan to purchase a computer, “peripheral equipment” (like a mouse or speakers), computer software, or internet access.

What happens to unused 529 funds? Your 529 account will never expire, even if your child ends up not using it. You can leave the funds in the account, allowing investments to grow tax-deferred, and use the funds down the road for a grandchild or another qualified family member.

529 college savings plans do not have contribution deadlines. You may contribute to a 529 plan at any time throughout the year, and you do not have to stop making contributions once the beneficiary reaches a certain age.

What happens if you contribute too much to 529? ›

The tax cost of overfunding a 529 account

They could take back the money in the 529 account, or give it to the student. However, in both cases, taxes and penalties must be paid on the earnings at the recipient's ordinary income tax rate. Or, they could pass the account on to a lower generation (e.g., grandchildren).

529 Plans Offer Unsurpassed Income Tax Breaks.

Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college.

As a result of the SECURE Act 2.0 passage, starting January 1,2024 some unused 529 college savings plan funds can be rolled over to a Roth IRA (untaxed and unpenalized) once the 529 plan beneficiary has ceased withdrawing money for qualified higher education expenses.

If this investment earns 5% a year, you will have about $35,400 at the end of 18 years. But if you wait 9 years before you start saving, you will have accumulated about $13,900, factoring in that same 5% return.

Is a Roth IRA better than a 529 plan? A 529 savings plan is generally an all-round good choice to pay for your child's (or your own) college, while Roth IRA may be a better option as a backup account to supplement educational expenses.

The disadvantages of 529 savings plans include limited investment options, potential fees, a penalty if you don't use the withdrawals for eligible items, and more. Review all of them below and then decide if a 529 savings plan is right for you and your future college student.

In short, wealthy individuals can front-load large 529 deposits in such a way that the accounts can pay for several college educations decades from now and still have money left over for other family members pursuing higher education in future generations.

If you were to die or become legally incapacitated, the successor account owner assumes all rights and responsibilities for the 529 account. The successor can be, but does not have to be, a spouse. (A very small number of 529 plans permit spouses to establish the account as joint owners.)

However, if you invest in your own state's 529 plan or if your state is a "tax parity state," you may benefit from state income tax deductions on contributions or state tax exemptions on withdrawals. You can typically contribute up to $15,000 a year (or $30,000 for couples) without incurring the gift tax.

The annual gift tax exclusion is $16,000 per recipient in 2022 ($32,000 for a married couple giving jointly) and $15,000 in 2021. Some examples of situations that could trigger someone having to file a gift tax return include: Contributing more than $16,000 in a year to your grandchild's 529 plan.

What are the gifting rules for 529? ›

In general, you can contribute up to $17,000 ($34,000 for married couples) per beneficiary per year without triggering federal gift taxes. However, special 529 rules allow you to use five years of annual exclusions at once for a tax-free gift of up to $85,000 (joint taxpayers may fund $170,000).

Technology: Computers, iPads, printers, internet service and required educational software used by the 529 beneficiary while enrolled in college are qualified expenses.

You need to show the IRS that withdrawals from your 529 plan did indeed go toward eligible educational expenses. That means showing documentation in the form of receipts, cancelled checks and other forms of payment.

Equipment: If the student needs equipment such as a laptop, printer or internet service, you can pay for these out of the 529 plan.

For example, books that are highly advisable to have as a student but not required-a dictionary and thesaurus, for example-do not qualify. Personal expenses, transportation costs, backpacks, pens, notebooks and computer paper are other examples of non-qualified expenses. 8. Designate a successor account owner.

Can you reimburse yourself from a 529? You can reimburse yourself for qualified expenses from your 529 plan after you've already paid for them, as long as you still withdraw in the same calendar year. You cannot reimburse yourself for nonqualified expenses or you will be taxed on that withdrawal.

If a student meets the eligibility criteria, the account owner can use the 529 plan to pay for both on-campus and off-campus housing expenses. If the student is living on-campus and using a meal plan, paying for room and board with a 529 plan is easy as most plans have an option to send a check directly to the school.

529 plan age limits

When the beneficiary turns age 30, any leftover funds in the account must be withdrawn within 30 days to avoid income tax and a 10% penalty.

What Happens to 529 Money When a Child Turns 21? 529 accounts owned by parents stay in the parents' control so long as they'd like.

One of the provisions of the law is that 529 plan owners can use their funds to pay off up to $10,000 of the account beneficiary's student loans. That $10,000 lifetime limit is per beneficiary, however, not per account.

How much will my 529 be worth in 10 years? ›

With a 529 plan, a solid monthly contribution amount for a child born in 2022 would be about $140 for a public in-state school, $215 for public out-of-state, or $350 for a private university.

There are no income limits for 529 plan contributions. There are income limits for Coverdell ESA contributions. Any U.S. citizen or resident alien with a valid social security number or taxpayer identification number at least 18 years old can open a 529 account.

What is the 529 plan withdrawal penalty? If you don't use your college savings plan for eligible expenses, your 529 plan nonqualified withdrawals may incur a 10 percent penalty and will also be subject to federal income taxes on the investment gains at whatever rate the IRS would normally charge.

You can use the contributions and earnings tax-free for qualified educational expenses. Owners of 529 plans may also qualify for state-level tax deductions. Although your contributions to a 529 College Savings Plan are not tax deductible, you still receive a benefit.

If you're less than five years away from retirement, it probably won't make sense to convert to a Roth IRA. A Roth conversion will trigger taxes, so you must be willing and able to pay those taxes.

After 20 years, you will have paid 20 x 12 x $100 = $24,000 into the fund.

Gifting can help with estate planning

Gifters can contribute up to $16,000 in 2022, and up to $17,000 in 2023, to a 529 account per person, per year with no gift tax ramifications.

How much do most parents save for college? ›

Americans seek to save $55,342 on average for their child's college expenses. On average, parents expect to pay roughly 30% of their child's college expenses. On average, parents actually pay 10% of their child's college expenses.

Roth IRA

Those contributions can grow tax-free, and you can take withdrawals up to the amount you've contributed without any taxes or penalties. Unlike a 529 plan, money in a Roth IRA won't count against financial aid eligibility.

Saving too much in a 529 plan is an expensive mistake

But if your savings exceed the cost, you may have to pay tax plus a 10% penalty on what's leftover. Given the uncertainty of college costs and investment returns, trying to cover exactly 100% of expenses with a 529 plan is practically impossible.

Gifts to 529 accounts can also help with estate planning. Gifters can contribute up to $16,000 in 2022, and up to $17,000 in 2023, to a 529 account per person, per year with no gift tax ramifications.

Can you make a 529 plan contribution for the previous year? No, you cannot make a contribution this year for last year and it counts for the previous tax year like you can with some investment accounts. You can deduct contributions made within the calendar year.

Parents may take a 529 plan distribution during the same year that they claim the AOTC, as long as there is no double-dipping.

529 Plan Tax Benefits

Note that there is no federal income tax deduction on 529 plan contributions. State tax benefits: Most states that have an income tax allow either a deduction from income or a state tax credit for 529 plan contributions when reporting income for state tax purposes.

529 Plans Offer Unsurpassed Income Tax Breaks.

Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college.

Yes! Even if your student is enrolled in a two-year, four-year, graduate, vocational or professional school, you can still save in a 529 plan. The tax benefits, after all, are still available to your Invest529® or CollegeAmerica® account.

When can you no longer contribute to a 529 plan? ›

There are no time or age limits on using a state 529 college savings plan. Money can be kept in a 529 plan indefinitely. 529 plans can be used for graduate school, not just undergraduate school, and can be passed on to one's children. There is also no age limit on contributions to a 529 plan.

For most states, contributions to 529 plans must be made by December 31 to have them count toward the current year for gift tax purposes. This differs from tax-advantaged retirement savings accounts like IRAs, where you typically have until mid-April of the following year to contribute for income tax purposes.

As a result of the SECURE Act 2.0 passage, starting January 1,2024 some unused 529 college savings plan funds can be rolled over to a Roth IRA (untaxed and unpenalized) once the 529 plan beneficiary has ceased withdrawing money for qualified higher education expenses.

What happens to unused 529 funds? Your 529 account will never expire, even if your child ends up not using it. You can leave the funds in the account, allowing investments to grow tax-deferred, and use the funds down the road for a grandchild or another qualified family member.

5-year gift tax averaging

The contributions are treated as though they were spread evenly over a five-year period starting with the current calendar year. The lump sum contribution will use all or part of the annual gift tax exclusion for the beneficiary during the five-year period.

529 plans are considered assets of the account owner, which is often a parent. The 529 plan account owner may change the beneficiary or take a distribution at any time for any reason, whether or not it is in the best interest of the original beneficiary. In most cases, parents appreciate this flexibility.