What is the Maximum Contribution to a 529 Savings Plan?
Section 529 of the Internal Revenue Code authorizes a specific program for parents to set aside money for their children's future college tuition. Federal financial-aid regulations require the parents of dependent students to make a significant contribution to the overall cost of education. Because higher education can be so expensive, and with prices often rising faster than the official rate of inflation, starting early can be crucial to affording college. Though there is no maximum contribution, the structure of the contribution can have tax implications.
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Types
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There are two types of 529 Qualified Tuition Programs (QTP). A prepaid tuition plan can itself fall into one of two categories. Prepaid unit plans sell units that represent a fixed percentage of tuition, with the price of a unit typically increasing each year. In a contract plan, the parent agrees to purchase a specified number of years of tuition, with the purchase price depending on the age of the child and whether the payment is a lump sum or in installments. The second type of 529 plan is the savings plan, which creates a dedicated investment account to which any individual can contribute toward a particular student's higher education expenses. More recently, a group of private U.S. colleges and universities have created the Independent 529 Plan, which offers discounted tuition at any of the participating institutions.
Features
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Every state, including the District of Columbia, offer some sort of 529 college savings plan. Aside from encouraging saving, a primary feature of these plans is that they can lock in the cost of higher education. Plans that sell prepaid units or contracts maintain their value and always represent the amount of time that was originally purchased, even if the rates subsequently increase. Prepaid tuition plans are exempt from federal income tax and, in many cases, from state and local income taxes as well. Because savings plans can receive contributions from anyone, and are often tax deductible, they encourage other family members and friends to help shoulder the burden.
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Considerations
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There is no limit to the amount that can be contributed to a 529 savings plan. Limitations do exist, however, on how much of the contribution can be written off for tax purposes. Contributions to 529 savings plans are treated as gifts under federal tax law, and are therefore subject to the $12,000 gift exemption limit in 2008 and $13,000 in 2009. Contributions above this limit are treated as taxable gifts, but can be rated for as much as five years. This means a contribution exceeding the gift exemption limit, though made in a single year, can be reported over several years to get below the limit, ostensibly raising the untaxed contribution limit to $60,000 per individual.
Identification
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College savings accounts can only be created for a single beneficiary, meaning families with more than one college-bound child may need to purchase more than one plan. The account can be transferred, however, to another beneficiary. In some states, different plans exist for two- and four-year colleges, and may differ in their treatment of room and board expenses. Most plans are also usually designed around the costs of in-state public college and may not cover all the expenses associated with out-of-state tuition.
Significance
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Unlike a prepaid tuition plan, which freezes the cost of education at the time of purchase, the performance of college savings depends upon the investments in which the plan is involved. Capital gains on most college savings plans are not taxed at any level, and many are backed by the full faith and credit of the state in which they are made, making the likelihood of a loss relatively low. Furthermore, the proceeds withdrawn from a college savings plan are not subject to federal tax upon withdrawal if used for a qualified educational institution.
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