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Do 529 Plans Have Contribution Limits?

When used correctly, these popular education savings plans can be tax-smart choices for college planning.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. 529 education savings plans are popular choices for investing for college. Here with me to discuss some of the contribution limits and tax considerations when investing in 529 plans is Patty Oey. She's a senior analyst with Morningstar's research team.

Hi, Patty, nice to see you today.

Patricia Oey: Hi, Susan, nice to see you, too.

Dziubinski: So, let's start out with the elevator pitch for 529 education savings plans: What are they?

Oey: Sure. These plans, what they have is they have a menu of investment options. Usually the default option is something that derisks over time. So if you invest when your child is young, the portfolio will be heavy in equities, and they'll trim the equities down as the time passes, so that when you get ready to spend the money, the equity allocation is lower so you don't see the portfolio value move so much just before you're about to spend it. Plans will also offer a menu of mutual funds and ETFs that you can also invest in, and then finally there is a place to park your cash. So it'll be like a stable value or an FDIC-insured account.

Dziubinski: Now, who can invest in a 529 plan and for whom?

Oey: Sure. Technically, anyone can open a 529 plan and name a beneficiary. Typically, it's the parents who open a 529 plan for their child, but certainly grandparents can do it. And then someone like me, I have six nieces and nephews—I can open one for each of them as well. And then family friends. So really, anyone can open one as long as there is a beneficiary who's planning to go to school.

Dziubinski: Now, can beneficiaries only have one 529 education plan?

Oey: No. Again, going back, so I have two kids, so I can open one for each kid and then say, you know, they have their grandparents, two sets of grandparents, so each grandparent can open an account for that one son. Yes, one person can have more than one account.

Dziubinski: Now, let's talk a little bit about annual contributions. Are there annual contribution limits when it comes to these plans? For instance, how much can one person invest in someone's 529 plan?

Oey: Technically, there is no contribution limits, but putting money into a 529 account, it's considered a gift. So, it is technically subject to the gift tax exclusion. In 2022, that is $16,000. If you do go over, then it gets counted against your lifetime exclusion. That is $12 million. I guess technically, if you know later on that your estate is not going to be close to $12 million, there is no tax penalty for contributing more, but it is technically under the $16,000 limit per beneficiary, per donor. So I can give to my kid $16,000. My husband can also give to that same kid $16,000.

Dziubinski: Got it. Now, of course, as you pointed out, more than one person can contribute to a beneficiary's 529 education savings plan. Are there limits in total to how much money can be in a given beneficiary's 529 plan?

Oey: Say I have my son, and I have a plan for my son and my parents have a plan for him. The limit is per plan. And then generally, these plans are offered by different states, the states set the limit on how big the accounts can be. Roughly the maximum is equivalent to about a four-year education, tuition plus room and board. On the low end, some states, their maximum is closer to $300,000. On the higher end, it's probably like around $500,000 or more. It just depends on the state. But again, it's per account. For my account, say in our state, it's $500,000, I can max it out to $500,000. And then the plan that my parents open for my child, they can also max it out at $500,000, which is, you know, plenty of money.

Dziubinski: Patty, is there a way that an account can be accidentally overfunded? Let's say there is that $500,000 limit in a given account? What prevents it from going over that amount? And if it does go over that amount, what happens?

Oey: Yeah, good question. The plans, they have their cap. And so basically, if you hit that threshold, it will not accept more contributions. But certainly the market moves. So if the market continues to move up, they're not going to suddenly just shut down your account. They'll let the market ride and let that account ride. But yes, they will not accept any more contributions once you've hit the threshold.

Dziubinski: Got it. And then just to wrap up, are there any other 529 plan contribution limits, tax considerations, anything that investors should be aware of if they're considering either opening a 529 plan or if they already have one that they're contributing to?

Oey: Right. The key thing is that you put the money in the account, it grows, and if you spend the money on qualified expenses, you don't pay capital gains on the ... capital gains that you enjoyed in that account. So everyone is eligible for that benefit. At the state level, different states have their own rules regarding state tax benefits. Some states don't offer any tax benefits. Some states don't have state income taxes, so there's no benefit to offer. And then a whole bunch of other states offer different types of state tax benefit. And what that mainly is, is that you can deduct your contribution when you calculate your state income tax liability.

Dziubinski: So before you make a decision, make sure you look at what state benefits you might be able to get from a tax perspective.

Oey: Yes.

Dziubinski: Sounds good. Well, Patty, thank you so much for walking us through some of these details with 529 plans. Again, they're very popular, are great ideas for saving for college and other educational expenses. But you've got to know the rules of the road. So, thank you.

Oey: Thank you.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.