- 529 plans are tax advantaged accounts
that allow you to spend money
on qualified education expenses.
These plans are often called 529 college savings plans
but they apply to K-12 expenses as well.
Those qualified expenses include things like tuition, board,
and books.
There are over 100 529 plans across the United States.
While plans are state specific,
in most cases you don't have to be a state resident
to invest in its 529 plan.
529 plans have various limits on contributions
and states control these limits.
In this video,
let's explore how 529 plan contribution limits work.
Hey, everyone. This is Andy Hill
with "The College Investor".
Investing and Personal Finance for Millennials.
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Okay, let's chat about how 529 plans work.
Money that goes into a 529 plan is after tax dollars.
However, those dollars will grow tax free.
This means tax free at the federal level.
State level taxing will vary by state
but many states offer 529 plan tax breaks.
529 plans come in two flavors.
A locked-in rate, which is similar to an annuity,
and a savings plan, which allow you to invest
in different funds earning a variable return.
Plans that have a locked rate allow you to calculate
from day one what your return will be.
Plans that allow investing in funds
are more dependent on the fluctuations of the stock market.
So, what are the 529 plan contribution limits?
Whether based on the gift tax guidelines.
As of 2022 the annual contribution limit
is $16,000 per contributor.
In 2023, the annual 529 plan contribution limit
is $17,000 per contributor.
That means in 2023, a couple can gift $34,000.
The partner one can contribute 17,000
and then partner two can contribute 17,000.
Unlike retirement accounts,
the IRS does not impose annual contribution limits
on 529 plans.
Instead, limits are based on the aggregate contributions
and they're controlled by the states.
This means a person can contribute
a large amount in one year,
as long as it doesn't go over the aggregate amount.
Some states do impose an annual limit
on contributions though.
There can also be a few obstacles
to making such large contributions in a single year
but we'll get into that later.
529 plan contribution limits are generally large.
They range from $235,000 to $529,000.
Here are some per beneficiary contribution limits.
Arizona, $505,000.
Georgia and Mississippi, $235,000.
North Dakota, $269,000.
Michigan, Maine, Idaho, Louisiana,
South Carolina, Washington, and Washington DC, $500,000.
And California, $529,000.
Most states offer multiple 529 plans
and you may find that plans within the same state
have different limits.
For example, the MO ABLE Missouri 529 plan
has an aggregate limit of $482,000,
while the most Missouri 529 education plan
has a limit of $325,000.
Both plans, however, impose a per year contribution limit
of $16,000.
When choosing a plan, you wanna check to see
if there are only aggregate limits or annual limits as well.
Also, don't confuse any limitations
that your state of residence may impose
if you are investing in an out-of-state plan.
Any limits are only imposed
by the plan you are investing in.
If that happens to be an out-of-state plan,
your state of residence doesn't have any say
in your 529 plan contribution limits.
Let's talk gift tax considerations.
Any money or property,
including 529 plan contributions that you give to someone
is likely to be considered a gift by the IRS.
Thankfully, there is an annual gift tax exclusion
of $16,000 per recipient.
Even if you gift more than $16,000 per individual per year,
it will simply count towards
your lifetime gift tax exclusion.
You'd have to give 11.58 million over your lifetime
before you'd run into paying gift taxes.
Let's talk about super funding or the 5-year election.
The 5-year election allows you to contribute up to $80,000
to an individual's 529 plan in a single year
while spreading it out over five years.
For each of the five years,
you must report the 5-year election on the IRS form 709.
This is a great option to use
if you anticipate higher expenses during the first year.
You'll also be able to take advantage of compounding growth.
Now, let's talk about how to choose a 529 plan.
There are a few things to keep in mind
when choosing a 529 plan.
529 plans are always tax free at the federal level.
Some states provide a state tax break as well.
For states with income taxes,
you wanna make sure the tax savings
are enough to cover the 529 plan fees.
If not, keep in mind that you don't have to invest
in your state's 529 plan
and that there are over 100 529 plans available
to choose from.
Fees are a big consideration when it comes to 529 plan.
These include annual account fees,
management fees or expense ratio on funds, and load fees.
In addition to comparing fees,
pay attention to any extra included benefits.
For example, some 529 plans
even provide matching contributions.
If you're ready to start investing,
check out our guide to see the 529 plan options
available in your state,
the benefits you may be eligible for,
and our top recommendations.
We'll have that link in our video description.
Well, enough from our side, everyone,
we want to hear from you.
Are you contributing to a 529 plan already?
Or are you considering it for your kids
and their college future?
Please let us know in the comments below.
This is Andy Hill from "The College Investor",
and we'll see you in the next video.