getty
Qualified tuition plans, such as 529 plans, don't operate in a vacuum.The funds within it are subject to market fluctuations, the states’ and District of Columbia’s plans have contribution caps and the IRS imposes a federal gift tax if a taxpayer’s contribution exceeds limits. Yet, any perceived drawbacks pale in comparison to the many pluses that help you finance education. In this article I explain what a 529 plan is and what the contribution caps and tax benefits mean for you in 2024 and 2025.
Tax Benefits Of 529 Plan Contributions
A 529 plan is a tax-deferred savings vehicle that grows tax-free and helps you pay for higher education and trade schools, elementary or secondary, public, private or religious schools and sometimes even foreign schools, noted the Consumer Finance Protection Bureau (CFPB). The plan allows you to deduct funds from it without penalty to pay for tuition, fees and other related expenses, which are required for enrollment or attendance at an eligible educational institution.
Although contributions to a 529 plan are not deductible, the federal government offers other tax advantages, such as imposing no taxes on earnings when used to pay for eligible college expenses.
State laws give holders of 529 plans other advantages. “More than 30 states and the District of Columbia offer a state income tax deduction or tax credit for 529 plan contributions,” wrote the site Saving for College. According to the site, to qualify for a state income-tax benefit taxpayers must contribute to their state’s plan. Nine tax-parity states offer state income tax relief for contributions to any 529 plan, regardless of which state it is in. Those states are: Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio and Pennsylvania. State income tax benefits are based on the amount of a taxpayer’s total 529 plan contributions in a given tax year. “While no annual contribution limits exist for 529 plans, most states limit the total contributions that qualify for an income tax credit or deduction,” according to Saving for College.
529 Plan Contribution Limits For 2024
States do impose contribution limits, which may change sporadically, on the aggregate amount allowed over the fund’s life for the same beneficiary. In 2024, 11 states, including the highest Arizona, at $575,000, offer limits at $545,500 and above. Georgia and Mississippi set the lowest at $235,000. To come up with a dollar amount, state officials factor in the aggregate amount of the cost of the state’s most expensive four-year college and graduate school.
While the federal government places no caps on contributions to a 529 plan, it can deter contributions by imposing taxes and a penalty. In 2024, if your contribution as an individual exceeds $18,000 and $36,000, as a couple, to one person, you trigger a federal gift tax. You can give to others, too, with the same limitations.
Much more than breaking news, our diverse reporting digs deeper with unparalleled insights that empower you to make better informed decisions. Become a Forbes member and get unlimited access to cutting-edge strategies, actionable insights, and updated analysis from our network of leading finance experts. Unlock Premium Access — Free For 25 Days.
529 Plan Contribution Limits For 2025
The 50 states and the District of Columbia issue revisions in their own aggregate contribution limits sporadically. “They do not change in most years, like we typically would see with retirement account limits,” Joshua Bitel, CFP, Center for Financial Planning in Southfield, Michigan, told me. If you have questions about contribution limits in the state where your 529 program is located, check in with the state.
In 2025, if your contribution amount is more $19,000 for an individual and $38,000 for a couple, you trigger a federal gift tax and penalty. The agency issues new ceiling numbers for the next year between October and November of the year prior.
529 Plan Qualified Expenses
The 529 plan allows you to pay for many college expenses, such as “tuition, fees and other related expenses for an eligible student that are required for enrollment or attendance,” wrote the IRS. If you use the plan to pay for non-qualified costs, you can be penalized with taxes and a fine.
The plan typically does pay for room and board, insurance, medical costs (including student-health fees), transportation and similar personal living and family expenses, as they are considered non-qualified expenses, according to the IRS.
Strategies For Maximizing 529 Plan Contributions
Don’t leave money on the table. Some of CPA Larry Pon’s clients use the 529 plan to pay tuition only, Pon, of Pon & Associates in Redwood City, California, told me. That’s a loss.The 529 also covers the school’s fees and other related expenses, which are required for enrollment or attendance, noted the IRS.
Other suggestions are to streamline your contributions by automating regular deposits to the plan, “superfunding,” which allows you to make five years of contributions in one year and being forthright with grandparents or others on your preference for their contributions to the 529 plan, rather than give your children toys or other gifts they will grow out of.
Bottom Line
It’s nearly time for the new year, and with that come various benefits and restrictions that will impact the 529 plans you oversee. Before the ball drops, bone up on changes coming from the states and D.C. and the IRS that affect your 529 plan's bottom line, and then rest easy knowing the rewards will come.
Read Next
- HSA Contribution Limits For 2024 And 2025
- 8 Top Tax-Loss Harvesting Tips To Reduce Your Tax Bill
- 9 Savvy Investment Tax Saving Moves To Make Before 2025
Whether it’s mastering cutting-edge strategies, uncovering actionable investment opportunities from influential leaders, or breaking down complex topics, our in-depth journalism has you covered. Become a Forbes member and gain unlimited access to bold ideas shaking up industries, expert guides and practical investment advice that keeps you ahead of the market. Unlock Premium Access — Free For 25 Days.
