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529 Plan Contribution Limits 2013
About 529 Plans History Definition
With the increasing cost of college tuition becoming a burden upon many families, Congress passed laws creating tax advantaged ways to save for college. The plans, like 401(k) plans, became known for their section number in the tax code.
529 plans are the preferred way to
save for college. There is no federal income tax deduction for
contributions to 529 plans, money invested inside of the plan grows
tax-free and can be withdrawn tax-free if used for educational expenses.
Congress created 529 plans and gave them special federal income tax treatment. However, 529 plans are administered by individual states. This results in differences in each state's plan structure, including different contribution limits. However, the limitations on 529 plan contributions are generous and typically not exceeded.
Update: Information about 2011 529 plan contribution limits is provided here.
How To Invest in 529 Plans
All 50 states have at least one 529 plan. Some states have multiple plans for various reasons. Some states offer residents additional tax deductions for contributions made into the state sponsored plans. These states allow residents to deduct some, or all, of the contributions made from their state income taxes. Which is a good way to save on taxes.
There is a lot of confusion caused by the way 529 plans are administered by the states. It helps to remember these basics:
- There is no requirement to use the 529 plans from a specific state.
- The owner of the plan can use a plan from any state no matter where the student lives.
- The student can use any plan from any state to pay for school, no matter where the school is.
A contribution to a 529 plan is considered a gift, and is therefore subject to gift taxes and the rules regarding estate taxes and the estate tax exclusion. Each person may contribute up to $14,000 in 2013 without triggering gift taxes. Therefore, a married couple filing jointly may thus contribute up to $28,000 ($14,000 each) to the 529 plans of a single person.
529 plans allow contributors to front-load their contributions. Gifting of up to 5 years worth of contributions at once is allowed. However, 529 plans do have a limitation on the overall size of the account, although his limitation varies by state. For example, the State of Colorado restricts contributions once the account balance is $280,000, while Texas allows contributions until $320,000.
If an the funds in a 529 plan are not used for college expenses, there is a 10 percent tax penalty on the amount withdrawn. However, the tax advantages gained over the lifetime of the account should greatly outweigh the penalty.
529 Plans are a great way for parents to save for their children's college, and for students to invest money for their own college expenses.