A 529 plan is a tax-advantaged account designed to help parents save for their child's education expenses. As of 2012, all 50 states offer at least one type of 529 plan. The IRS establishes the tax guidelines for these types of accounts, but each plan is administered at the state level. If you're thinking of opening a 529 account for your future scholar, it's helpful to know how much you can contribute.
Who Can Contribute
Generally, you can contribute to any state's 529 plan, regardless of your actual state of residence. You must be at least 18 years old and a U.S. citizen or a resident alien. If you meet these basic requirements, you can contribute to a 529 plan regardless of your income level. When you set up a 529 plan, you'll need to name a beneficiary. For IRS purposes, a qualified beneficiary can be yourself, your spouse, your child, grandchild, sibling or other family member. You can set up a prepaid tuition plan, which lets you pay tuition for future college studies at a locked-in rate, or a savings plan, which allows you to make tax-free investments.
Lifetime Contribution Limits
The lifetime contribution limit is the total amount of money you can contribute to a 529 plan on behalf of a specific beneficiary. Lifetime contribution limits are determined by each state's plan administrator. As of 2012, some states allow you to contribute up to $300,000 to a single 529 plan. If you sign up for a 529 prepaid tuition plan, the limit is generally based on total contributions. If you sign up for a 529 savings plan, the limit may include both contributions and earnings.
Annual Contribution Limits
While there's no limit on how much you can contribute to a 529 plan in a single year, you may have to pay taxes on larger contributions. The federal gift tax applies to financial gifts that exceed certain annual limits. For the 2012 tax year, the exclusion limit was $13,000 for single filers and $26,000 for married couples. This means if you contribute more than the annual limit to a 529 plan each year, the excess amount is subject to the gift tax. The only exception to the rule is if you're paying the money directly to a student's college or university.
Considerations
If you have more than one child, the lifetime contribution limits apply to each beneficiary's 529 plan. Under the gift tax rule, you and your spouse can contribute up to the annual exclusion limit for each child. If one of you contributes more than the other, you can avoid paying gift tax on excess contributions by splitting the gift. Say, for example, you contribute $16,000 to your child's 529 plan and your spouse contributes $10,000. Ordinarily, you'd be subject to gift tax because your contributions were more than $13,000. If your spouse agrees to combine contributions and split the gift, no gift tax is due.
