Saving for your kid’s college costs can seem daunting, but 529 plans could be a fairly simple way to prepare for those bills. These tax-advantaged accounts have high contribution limits that allow you to stash away savings for higher education. Here’s a look at 529 contribution limits for 2023, plus ways you could maximize your contributions.
529 contribution limits
Because each state sponsors its own 529 plan, they have their own rules about 529 contribution limits. Still, they all follow federal law: the earnings portion of any withdrawal not used for qualified higher education expenses (QHEEs) in a 529 is taxable and may be subject to a penalty. Beyond tuition, qualified expenses include books, classroom supplies, fees, electronics such as a computer, and reasonable room and board charges.1 As anyone familiar with US college costs can tell you, QHEEs can add up to a possibly large sum. For the 2022 to 2023 school year alone, the average published tuition, fees, and room and board at a 4-year public school for out-of-state students is $40,550, while a private nonprofit 4-year school costs $53.440.2
Most states have 529 plans, so you can choose from a whole bunch. You don’t have to pick the plan your home state sponsors or even a plan in the state where your child goes to college. But many states offer incentives for residents to use their plans, including state income tax benefits, which may only apply up to certain 529 contribution limits.3
529 gift tax contribution limits
When you think of 529 contribution limits, you might actually be thinking of the annual gift tax exclusion. That’s because the IRS counts contributions to 529 plans as gifts. In 2023, you can gift up to $17,000 (or if you’re married and file taxes jointly, up to $34,000) per recipient without those contributions counting toward your lifetime gift tax exemption.4 So if you have three kids and three 529 plans, and you’re a single parent, you can contribute $17,000 each, or $51,000 total, in a year without having to report those contributions to the IRS. Any contributions above the $17,000 (or $34,000 if you’re married) per year per recipient must get reported to the IRS and will count toward your lifetime gift tax exemption of $12.92 million (or $25.84 million for married couples) in 2023. Go above that total amount in gifts, and you’ll be subject to a gift tax.5
If you want to contribute more to a 529 account in a single year without counting against your lifetime gift tax exemption, the account can be “superfunded.” You can fund a 529 plan with up to 5 years’ worth of contributions all at once. That means an individual can contribute up to $85,000 in a single year to a particular 529 plan.6 But you couldn’t give more money to that same recipient within that 5-year period without counting against your lifetime gift tax exemption.
How much should you contribute to a 529?
Deciding how much to contribute to a 529 plan depends on a number of factors, including your distribution time frame. How many years do you have until you’ll use the funds from the 529 plan? Will you need to take out funds for private elementary or high school education, or will everything sit until college?
Another major factor: your own financial situation. Strategizing your 529 plan contributions is smart for helping to afford your child’s future education, but first you have to be stable yourself, and funding your retirement. So make sure your financial house is in order—as in, you can afford your bills and also put away plenty for retirement—before contributing to a 529 plan.
How to maximize your 529 contributions
Now that you know the fine print behind 529 contributions, here are some ideas to help those contributions potentially go further.
- Research 529 plans from various states to find the right fit for your family. Your home state may offer income tax incentives or other benefits that might make its 529 plan a good option. Weigh the pros and cons of each plan to help determine the best pick for you.
- Remember that 529 plans aren’t just for college anymore. The federal government allows distributions to pay for tuition, up to $10,000 per year, at elementary or secondary public, private, or religious schools.7 If your child has a tuition payment before college, consider utilizing tax-free 529 distributions to pay those bills.
- If superfunding is financially possible for you, it can help generate more money for the 529 plan’s beneficiary. A larger lump sum contribution may potentially generate more earnings compared to the same size contribution spread out over months or years because it has a longer time horizon.
- If grandparents are contributing to a 529 plan, contributing a larger “superfunded” amount can work as an estate-planning strategy. The contribution removes the large sum from the grandparents’ taxable estate.
- Keep in mind that anyone can contribute to a 529 plan, not just the account owner.