529 Plan Contributions

Making the Most of Tax-Deductible Education Investments

Man using computer at a desk to determine their 529 contributions
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One of the most powerful college savings vehicles is the 529 college savings plan. It allows you to make significant contributions that accumulate tax-free as long as you follow all relevant tax rules and laws. The money in 529 plans can be used to pay for any college-related expenses, including tuition and fees, room and board, textbooks, and computers used for school. The money can be used to pay for either undergraduate or graduate programs.

There are many things to like about 529 plans, but there are also some reasons why it might not be the best option for you.

What We Like
  • Tax-free earnings if used on qualifying expenses

  • Broad definition of qualifying expenses

  • High contribution limits

  • Can start saving decades before beneficiaries reach school

  • Possible state tax deductions on contributions

What We Don't Like
  • Penalties on non-qualifying expenses

  • Impact of gift tax on large contributions

  • Unpredictability of market returns

  • Tuition hikes that exceed market growth

Maximum Contribution Limits

The IRS limits plan contributions to no more than what is necessary to pay for a beneficiary's qualified educational expenses. As state-sponsored programs, each state sets limits on how much can accumulate in their 529 accounts. Most base the limit on the total expected cost of higher education at eligible institutions.

Contributions can be made into the account until the beneficiary has $520,000 in New York. The account can still continue to grow once the limit has been reached, but new contributions would not be allowed. Other states have similarly high limits. California sets the maximum at $529,000 and Michigan allows up to $500,000.

Get a current copy of a state’s disclosure booklet to find the maximum allowed amount there. These numbers change from time to time, so always verify for yourself before making any investment decisions.

Gift Tax Issues

You can save a lot of money in a 529 plan, but adding funds too quickly can create complications. The gift tax limits how much money can move from one person to another before the IRS gets involved. Spouses who are both U.S. citizens can give each other unlimited amounts, but contributions to a 529 plan for a child, grandchild, or another individual might be considered gifts, and those gifts can affect your current or future taxes.

Annual Gift Tax Exclusion

Individuals are allowed to gift a certain amount each year before triggering the gift tax. This is known as the annual exclusion, and it's set at $15,000 for tax year 2021, increasing to $16,000 in 2022. The tax applies to the individual who's making the gift, not to the recipient. A married couple filing a joint tax return could potentially give up to $32,000 in 2022 without triggering a gift tax.

Giving More Than the Maximum

You’re free to gift more than the $15,000 or $16,000 exclusion to the same person in one year, but you must report the gift to the IRS on Form 709. You won’t necessarily have to pay taxes on the gift because it may potentially be covered by your lifetime gift tax exclusion, but you must report it anyway.

Five-Year Election

The IRS allows up to five years of 529 contributions at once with the potential to avoid gift tax consequences. You could contribute $75,000 in 2021 or $80,000 in 2022 (or $150,000 or $160,000 for a married couple) to a beneficiary’s 529 in one lump sum, but your IRS Form 709 must reflect your option to take the five-year election.

This is a powerful way to jump start a savings plan, but the rules can be complicated. It’s easy to accidentally “overlap” gifts and give too much. The contribution of additional gifts within the five-year election period may trigger tax consequences.

If the individual who made the contribution dies within that five-year period, their estate may have to include a portion of the contribution for estate tax purposes.

Direct Payments

Payments made outside of a 529 plan directly to a higher education institution for tuition expenses are generally not subject to gift taxes. That’s not much help if you’re socking away money for a newborn, but it could be helpful for parents or grandparents who want to help out while a child is in school. This strategy isn’t perfect, however, because it’s useful for tuition payments only.

Money for room and board or other expenses may be treated as a gift. Keep in mind, too, that it may affect the student’s ability to get financial aid.

Limits on Deductions

Another limit worth noting is the extent to which you get tax benefits in the current year. Filers may be eligible for a state income tax deduction on contributions to 529 plans in some states. State tax deduction availability will vary by state and each can have different deduction rules and limits.

The primary goal of a 529 account is to build assets for future expenses, so you may not care what the limits are. But it’s always good to know how much you can benefit from making contributions, and you don’t want to claim a deduction that you’re not allowed to claim.

For example, New York state taxpayers using a New York 529 plan may be able to deduct up to $5,000 (or $10,000 for married couples filing jointly) on their state tax returns. Illinois doubles those amounts (a married couple can deduct up to $20,000), and some states allow you to deduct the full amount of your contributions.

Some states base the limit on the taxpayer claiming the deduction, while others apply separate limits for each beneficiary. Contributing to multiple beneficiaries could provide a higher total deduction.


Contributions to a 529 beyond the gift tax exclusion might not qualify for a federal income tax deduction, but that’s not to say that federal benefits are nonexistent. Earnings inside of a 529 are not taxed annually, and all the earnings can potentially come out tax-free if the money is used for qualified higher education expenses. Of course, income tax and penalty taxes may be charged on the earnings if the funds aren't used for qualified expenses.

Consult a Tax Professional

States often make changes to 529 plan rules. Consult with a local tax advisor and a financial planner familiar with the rules in your state before making big decisions or taking action with your money. It’s always better to prevent problems before they happen by consulting with an expert.