How much can you contribute to a 529 Plan in 2021?
529 Plans are an invaluable tool to help save for college, so it’s important to understand their contribution limits. 529 Plans are unique because they can qualify you for a wide spread of tax benefits. These benefits can come from federal and state tax exemptions. Here are the overall 529 Plan contribution limits, as well as the limits for each of the benefits it can provide.
Related: What is a 529 Plan?
Limits on total balance
The total balance of a 529 Plan cannot exceed the projected total costs of the beneficiary’s higher education. This includes the cost of tuition, books, room, and board. Higher education can include both an undergraduate and a graduate degree. Each state calculates its own projected cost, and they are typically over $220,000. If your balance is getting close to $220,000, you should check your state-specific limit.
This total limit typically does not inhibit anyone from contributing. Because 529 Plans only provide tax benefits for educational expenses, there is no incentive to exceed the contribution limit. However, if you do approach the limit, don’t worry about exceeding it. It’s no cause for concern if your last contribution puts you over the limit. You’ll be able to keep that extra money in the account, but you won’t be able to contribute any more.
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Yearly contribution limits
529 Plans do not have an annual contribution limit. You can contribute as much as you’d like to a 529 Plan per year, but there are some caveats. If you contribute an especially large sum in one year, you may lose eligibility for some tax benefits. Here is a rundown of how those benefits work.
Learn more: How to choose a 529 Plan
The gift tax exclusion
You can claim 529 Plan contributions under the gift tax exclusion using Form 709. This exclusion renders contributions exempt from federal taxes. But it should be noted that this exclusion has a $15,000 annual limit. If you exceed this limit, your excess funds will count against your lifetime estate and gift tax limit. However, this limit is set at $11.58 million, so if you are not in danger of exceeding it, don’t worry. Your gift will still be exempt from federal taxes.
You can also contribute up to $75,000 in one year without exceeding your yearly limit if you utilize 529 superfunding. This allows you to max out your contributions for the next 5 years all at once. This tool is commonly used in making plans for someone’s estate.
State income tax benefits
Each state offers income tax benefits for 529 Plan contributions. Contributions made to a 529 Plan can be deducted from state taxable income up to a certain yearly limit. This amount varies by state; in Illinois, it is $10,000, but in Iowa it is only $3,474. These state benefits are independent of federal tax benefits.
Read more: What are the 529 Plan rules?
Next steps for students and parents
We suggest being strategic about your 529 Plan deposits. It’s a good idea to make your deposits over a long period of time in order to enjoy all of the plan’s tax benefits. This allows you to preserve your lifetime estate and gift tax limit, and to claim your maximum state income tax deductions. The overall limit on your account sum should not inhibit you; it should be able to cover all of your educational expenses. Good luck and happy saving!