What is the maximum 529 contribution? This question can actually mean two separate things.
- What is the annual maximum contribution I can make before gift taxes apply?
- What is the maximum contribution I can make in total to my 529 plan?
- What should I fund for a 529 plan for my child(ren)?
Let’s break these questions down…
Annual Maximum 529 Contribution
When you hear ‘maximum 529 plan contribution’, this usually refers to the annual gift tax exclusion. A 529 contribution is considered a gift to another person (i.e. your child). Gifts to other individuals above a certain threshold are taxable events in the United States.
For the 2024 tax year, gift taxes may apply for gifts above $18,000 per individual (or $36,000 for married couples filing jointly).
This applies to 529 contributions as well. You can contribute up to $18,000 each year, per child, without having to pay gift tax as of 2024. This amount can change annually based on inflation.
On the flip side, 529 contributions may earn you a tax deduction or tax credit in certain states. Generally, to obtain the tax deduction or credit, you must use the 529 plan designated by the state. The benefit can range from $80 to $1,200+ in a reduction of state taxes. Find out whether your state offers a benefit HERE.
If you are willing to file a Gift Tax Return (Form 709), you can stretch this contribution even further in a year.
The 5-Year Election for 529 Contributions
If you are going through an IPO or a large liquidation event in one year, you may decide to make a ‘5 year election’ to superfund your 529 plan.
This means you can contribute up to $90,000 per individual (or $180,000 for married couples filing jointly) to a 529 plan in a year. The catch is you cannot make further contributions to the 529 plan in the following 4 years and you must file a Gift Tax Return.
The benefit of making the 5 year election is mostly around time. You fund the 529 plan now and allow more time for the investments to grow. This can be a great way to ‘set it and forget it’.
Total Maximum Contribution to a 529 Plan
So if I can technically make a 529 plan contribution each year up to $36,000 for married filing jointly couples and I start the day my child is born, I could actually put in $648,000 by the time they graduate from high school???
Nope!
529 plan total contribution limits range from $269,000 to $570,000, depending on the state. This limit really boils down to what the state believes is a good estimate for attending school. North Dakota believes this to be $269,000 while Utah says this is $560,000.
Where you open your 529 plan should account for tax benefits, plan costs, investment choices, and how much you plan to contribute to it.
Funding a 529 plan for your child
Whether or not you should fund your 529 account to the max depends on a number of factors, including your income, your savings goals, and your child’s age. Here are some things to consider:
- Your income: If you are in a low tax bracket and expect to stay there, you may be eligible for financial aid through the FAFSA process. Get to know the components of how your ‘expected family contribution’ (EFC) is calculated to know how much would be expected of you in today’s dollars. If you are in a higher tax bracket or you’ve accumulated $2 million+ in investments, you will need to pay for the majority of your child’s college expenses.
- Your savings goals: Prioritize retirement savings and high-interest rate debt first. Put your own oxygen mask on first before helping a child! Then, if you feel comfortable you are on track financially, then consider what 529 contributions you can make.
- Your child’s age: If your child is young, you have more time to allow the 529 contribution to grow. This may mean a few years of maximum annual contributions will go a long way. However, if your child is older, you may need to contribute each year in order to save enough money. If your child is already in high school, you may want to consider whether a 529 plan is still the best option for you.
- Your child’s college plans: If your child is likely to attend a state school, you may not need to save as much as if they are planning to attend a private school. This is because state schools are typically less expensive than private schools.
The 529 conundrum
The best time to fund a 529 plan is when your child is still under age 3 for the largest potential growth… but you should only fund it based on what kind of college you expect them to attend… What does that mean I should do?
Ultimately, the decision of how much to contribute to your 529 account is a personal one. There is no right or wrong answer.
At SeedSafe Financial, we make sure our clients are on track financially. Then, we balance retirement dreams, expense expectations, and the desire to set their family up for success. This means each family may have a different plan:
- some may contribute $36,000 for a few years and stop,
- others may contribute $8,000 a year until high school,
- and a few will make a 5 year election and superfund a 529 plan to the max
The important piece of this is to know what you can afford to do that doesn’t put your own long term safety at risk.
Why should I consider contributing the total maximum to a 529 plan?
If you are in a good place financially, making $1M+ a year, or have a net worth of $10M+, there is a case to consider contributing the total maximum allowed.
It’s called the ‘multigenerational’ 529 plan strategy (or Dynasty 529 plan).
This is where you use a single 529 plan account to support education for multiple individuals. You start by creating the plan for your child and contribute up to the maximum $560,000 over the first 15 years.
Then, you utilize the funds for college expenses for your child (as intended). However, there will most likely be quite a bit left as the investments continue to grow. What happens to this ‘leftover’ money?
The IRS allows for a beneficiary of a 529 plan to be changed to “a member of the family” of the beneficiary. This means you could change the beneficiary from your child to your grandchild in the future.
The goal is for the investments to continue to grow over long periods of time – allowing the gains to compound. Then, when each future generation goes to college, they are able to use those gains and continue the line of funding. This feels like magic.
And with all magic, the IRS wants to know it isn’t being abused. Changing the beneficiary may still trigger the gift tax rules (remember those from the beginning of the article?). However, another 5-year election or part of the lifetime gift exclusion could be used to help offset this tax cost. (Work with your tax advisor to make sure this is correctly reported).
That is a lot to think about.
Remember how I said there is no right or wrong answer? Consider your individual circumstances and make the decision that is best for you and your family.
Some tips we suggest for all 529 plans:
- Start early: The sooner you start saving, the more time your money has to grow in the account. Even if you can only contribute a small amount each month, it will add up over time.
- Set up a regular contribution schedule: One of the best ways to save for college is to set up a regular contribution schedule. This will help you stay on track and reach your savings goal. You may decide to use ESPP funds on a quarterly basis, RSUs as they vest, or from your paycheck. Whatever method you choose, make it consistent.
- Take advantage of gifts: Let family know you’ve set up the 529 plan and send them a gift link. You may be pleasantly surprised at who all wants to help fund your child’s education 🙂
- Get professional advice: If you are not sure how much to contribute or which type of 529 plan is right for you, be sure to get professional advice from a financial advisor.
If you don’t have a financial advisor, consider scheduling some time to chat with us.
Did you enjoy this article and are looking for other ways to set your child up for financial success? Check out our blog post HERE.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
