Tax-free is saving for education-expenses like college, trade school, and allowed K-12 fees. Contribution limits by state vary but offer flexibility for families planning for surging tuition fees.
Rising costs of education
The cost of education continues to climb, with tuition fees for the 2024-25 academic year reflecting this trend:
- Public four-year in-state: $11,610 (up $300 from 2023-24)
- Public four-year out-of-state: $30,780 (up $940)
- Public two-year in-district: $4,050 (up $100)
- Private nonprofit four-year: $43,350 (up $1,610)
These increases underscore the importance of leveraging tools like 529 plans to meet future educational expenses.
What are 529 plans?
A 529 plan is known as a savings account opened by the state and is meant for families to grow their funds to pay for education. The amount contributes tax-free and will be withdrawn without federal taxes if it is allocated for qualified educational expenses. The Tax Act of 2017 allowed for the development of primary and secondary school expenses into the usage of 529 funds, originally limited to postsecondary education.
Key benefits
High contribution limits, often sufficient to meet an individual’s long-term savings goals, are one of the main advantages of 529 plans. Upon reaching the maximum imposed by state law, any additional contributions are returned to the contributor.
Contribution limits by state
Each state sets its own aggregate contribution limit for 529 plans, ranging from $235,000 to $575,000 per beneficiary.
States with the highest limits
The five states with the highest contribution limits in 2024 are:
- Arizona: $575,000
- Wisconsin: $567,500
- Utah: $560,000
- New Hampshire: $553,098
Alaska, Connecticut, Missouri, North Carolina, Vermont, Virginia, West Virginia: $550,000
States with the Lowest Limits
Conversely, these states have the lowest limits:
- Georgia, Mississippi: $235,000
- North Dakota: $269,000
- Hawaii, New Jersey: $305,000
- Delaware, South Dakota, Tennessee: $350,000
- Montana: $396,000
Annual contribution flexibility
Many retirement plans possess annual limits on how much an individual may contribute, but this is not the case for 529 plans. Contributions are considered gifts for tax purposes. Thus, contributions to the plan will go as follows in the year 2024:
- $18,000 per recipient without incurring gift tax consequences
- $36,000 for married couples filing jointly
Example of gift Tax application
Contribution to two 529 accounts by a married couple for their children will allow them to contribute $36,000 each to a child in 2024 or $38,000 in 2025 without incurring any reporting requirement. Any excess amounts, however, will count against lifetime gift tax exemption or incur a 40 percent gift tax.
Superfunding a 529 plan
For those looking to make substantial contributions upfront, superfunding allows you to pre-fund up to five years of contributions at once. In 2024, this means you can contribute:
- $90,000 as an individual
- $180,000 as a couple filing jointly
In 2025, these amounts increase to $95,000 and $190,000, respectively. However, no additional contributions can be made for the same beneficiary within the five-year period without affecting your gift tax exemption.
Maximizing 529 Contributions
To make the most of a 529 plan:
- Regularly monitor state-specific contribution limits.
- Optimize tax benefits by staying within annual exclusion limits.
- Consider superfunding for significant upfront contributions.
Final thoughts
The aforementioned statement is false as the above: However, as tuition costs head upward, families who continue to have future plans for their children’s education will still have to factor in the basic cost: the 529 Plan. This will serve more effectively if all the state-specific contribution limits and tax implications are understood from the onset to maximize the benefits and also conform to IRS rules. Whether it is making regular contributions or a superfunding contribution, 529 plans truly offer parents flexibility in the way of tax-sheltered savings for the eventual education of their child.
