contribution limits on 529 plans
College Money Guru,
What is the maximum amount that you can put into a 529 plan? I put
more than $200,000 into the New Hampshire or Vermont plan (sorry,
I don't remember which) and I am very close to the maximum contribution
limit. Can I go to another state and open another 529 plan or do
all 529 plans apply their upper contribution limits on an aggregate
basis? Please advise and thank you.
Federal law requires that states establish maximum contribution
limits to prevent people from contributing excessive amounts to
their 529 plans. Many states will establish their limits under a
formula that considers the highest-cost undergraduate and graduate
schools in the country, resulting in contribution limits that can
go above $300,000 per beneficiary.
Few states, if any, ask you about the money you have
in other states' 529 plans when applying their own contribution
limits. The IRS does not require that the states do so, recognizing
that it would be extremely burdensome -- perhaps impossible -- to
So what is to prevent you or anyone else from parking
a million dollars in tax-deferred 529 accounts spread among several
different states? In a word: nothing. There are no "contribution
police" to stop you, and there are no penalties for making
outsized contributions. (You may have some gift-tax issues, since
contributions are considered gifts from you to the named account
The problem arrives later on, when you withdraw from
your 529 accounts without enough college costs to support those
withdrawals. Federal income tax, and an additional 10-percent penalty
tax, will be owed on the earnings portion of any "nonqualified"
withdrawal. (The penalty, but not the tax, can be waived under certain
circumstances including the death or disability of the beneficiary,
or the receipt of a scholarship.)
If you end up taking nonqualified withdrawals, the
tax and penalty will likely negate the tax-deferral benefits of
your 529 investment. You might discover later that it would have
been better to put your money into a mutual fund, paying the low
tax rates on capital gains and dividends, but avoiding the administrative
fees charged by most 529 plans.
Although very few individuals (if any) open a 529
account with the intention of using it as a retirement account,
some government officials remain concerned that the risks are not
sufficiently high. The U.S. Treasury Department has proposed that
Congress increase the penalties under certain circumstances. If
that were to happen, existing 529 accounts will most likely be exempted
under the usual grandfathering protections.
One final note: I find it interesting that you cannot
remember which state sponsors the 529 plan you are using. You, no
doubt, receive quarterly account statements and other regular communications
from the plan. This suggests that for you -- and I'm sure for many
other people -- the identity of the state sponsoring the 529 plan
is not important. It's the underlying investments and the level
of fees that matter most. But try to commit it to memory. You really
should know where $200,000 of your money is.
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