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How Much Can Each Parent Contribute to a 529 Plan?

November 30, 2020
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Sootchy Team

Many parents want to save as much as possible for their child's education, but what is the maximum annual contribution for parents? Learn more from our 529 experts.

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Ensuring that your child has the resources they need to pay for college is no easy task, even with years or decades in which to prepare. For families across the country, one of the most effective ways to achieve this financial goal is through a savings account, though these accounts come in many forms, some of which are more effective than others at accumulating funds for higher education. Among the best college savings tools is the 529 college savings plan, a tax-free account that provides returns on contributions over time. If you have or are considering opening a 529 plan and want to maximize the benefits of these returns, you might be wondering, “How much can each parent contribute to a 529 plan?” To find out, keep reading as the experts at Sootchy provide the answers you’re looking for.

What Determines How Much a Parent Can Contribute to a 529 Plan?

If you’re trying to save for your child’s future with a 529 plan, it’s easy to question whether you’re contributing enough, but keep in mind that there are limits on how much you can add to the account each year – at least, without triggering a tax obligation. That’s because any contribution to a 529 plan is considered a gift under U.S. tax law, since it’s a transfer of funds without an expectation of some equally valuable return on the amount given.

This tax treatment means that the main determining factor that can limit how much each parent contributes to a 529 plan is the federal gift tax, which has the potential to impose a significant financial burden on those giving above the IRS-mandated limit. However, there are some unique aspects of the gift tax that can incentivize large single contributions to a 529 plan, and there is the lifetime gift tax exclusion to consider as well. We’ll cover each of these topics in greater detail below.

Gift Tax Limits on Parent and Relative Contributions to 529 Plans

Whether you’re a parent giving to their child or an aunt, uncle, grandparent, or cousin donating to a relative’s college fund, anyone deciding how much to contribute to a 529 college savings plan this year may want to keep two figures in mind – the annual gift tax exclusion and the lifetime gift tax exclusion, either of which could end up limiting the amount of tax-free contributions you can make.

In either case, parents receive the same treatment as any other person making a contribution: each parent can give up to $15,000 annually to their child’s 529 plan without having to file a gift tax return, for a total of $30,000 per year. Any more than that amount could be subject to the federal gift tax rate, which starts at 18% and increases with the size of the gift. However, anyone directing that gift to a 529 plan will have the option to treat their contribution as though it was made over a five-year period for gift tax purposes; in other words, each parent can give up to $75,000 at once, and the contributions will be taxed as though they were made in five yearly installments of $15,000, keeping you under the gift tax limit.

Of course, if you have the means to give more than $15,000 per year to a 529 plan, odds are you’ll be able to save up for college in just a few years, and the gift tax may be moot anyway, thanks to the lifetime exclusion. Over the course of their lives, each parent can gift up to a certain total amount without being taxed, and in 2020, that limit was $11.58 million per person, or $23.16 million per couple. Any amount given to a 529 college savings plan over the annual limit will be deducted from that person’s lifetime exclusion, so you probably won’t have to pay taxes on extra contributions; just keep in mind that every dollar taken from that lifetime allowance is a dollar that can’t be given as part of a person’s estate.

What is the Minimum Each Parent Must Contribute to a 529 Plan?

Now that we’ve covered the maximum amount a person can give to a 529 plan, let’s touch on minimum contributions. The minimum amount each parent has to give to a 529 plan will vary from state to state, as each plan has its own requirements. For instance, California’s 529 plan requires a minimum contribution of only $1 to open an account, while South Dakota requires $1,000. In most cases, once the upfront contribution requirements have been met, account holders can give whatever amount they want whenever they want, with one notable exception: prepaid tuition plans.

When opening a 529 prepaid tuition plan, the account owner – most likely a parent – will have to sign a contract that dictates the size of contributions to the account, which might be made monthly or in a single lump sum. To change or stop payments, you’ll likely have to cancel the contract, so keep your ideal contribution size in mind when choosing your 529 plan.

Contact the 529 Plan Experts at Sootchy and Start Saving for Your Child’s Education

With the cost of college rising and student debt climbing, it’s no wonder why 529 college savings plans are more popular than ever. These accounts offer a wealth of benefits that any parent should consider, and with the help of the team at Sootchy, opening one of these plans is easier than ever. Visit us online or download the Sootchy app and start saving for your child’s education today.

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