529 plan contribution limit.

A 529 college savings plan offers a tax-advantaged way to save for future learning costs, like tuition and housing, for a loved one. However, there are important rules to follow in order to maximize the benefits of this kind of savings account.

A young couple sitting at the table reviewing paperwork with their baby.

What is a 529 plan?

Whether it’s an Ivy League college or a local trade school, post-secondary education has become a near necessity for success in today’s job market. Unfortunately, college costs keep rising, making it less affordable for everyone. 

In the past 10 years, average college costs have risen 28%, far exceeding the rate of inflation.¹

Many people are relying on student loans to cover this increase, but that has led to its own crisis. Another way to pay for college is to set up a 529 college savings plan while your child is still young.

A 529 plan is a tax-advantaged vehicle meant to fund select education expenses. Your contributions are allowed to grow tax-deferred, much like in a 401(k) and can even be withdrawn tax free when they are used on qualified expenses.

Related: Start a 529 college savings plan

Who can contribute to a 529 plan?

Basically anyone. Once it’s set up, a parent, relative, or even a family friend can invest in a 529 plan to save for a child’s future education. In fact, it makes a great early life gift, setting up a loved one for a successful future. 

Generally, it’s better for a parent to own the 529. For now, plans owned by a grandparent or another nonparent may affect the student’s ability to get federal student aid (FAFSA) and other need-based financial aid. Future legislation may change this.

Tax advantages of a 529 plan

Each individual plan will have different investment options for your 529. Generally, plans offer a selection of mutual or exchange-traded funds that invest in equities, fixed-income securities, a mix of both, or even target-date portfolios. Some options may have the potential for higher growth, but they come with additional risks. All investments are subject to market fluctuations. Depending on your risk tolerance and on how long the account will have to grow, you may want to be bold, or you may prefer a conservative approach.

What investments can I make in a 529 plan?

Each individual plan will have different investment options for your 529. Generally, these are a selection of funds that invest in equities or fixed income securities or a mix of both, or even target-date portfolios. Some options may have the potential for higher growth but come with additional risks. All investments are subject to market fluctuation. Depending on your risk tolerance and how long the account will have to grow, you may want to be bold or stick to a more conservative investment approach.

Each state has its own rules

Additional state tax benefits and rules vary, and living in a state does not necessarily mean you have to choose that state’s 529 plan. It’s worth noting, however, that more than 30 states offer a state income tax deduction or credit for 529 plan contributions, and in most of these states you must contribute to an in-state 529 plan to be eligible. Most states will not tax gains from out-of-state plans, though. Through NYLIFE Securities, you have access to 26 different plans from 26 states, and we can help you choose the plan that will best meet your child’s future needs.

529 plan contributions

Contributing to a 529 is pretty simple. With most options, you’ll be able to add lump-sum payments or work out a monthly contribution. In certain states, you could choose for these to come right out of your paycheck, or you can set up a direct deposit with your bank. While there is technically no yearly contribution limit, contributions to a 529 plan are considered gifts for federal tax purposes. In 2023, up to $17,000 per doner qualified for the annual gift tax exclusion. Contributors will want to stay within this exclusion, so taxes are not owed on the gift. You may be able to contribute more by using a “5-year gift front-load” rule, so be sure to consult your tax professional to understand how decisions can affect taxes.

529 plan limits.

Each state is different, but many have total contribution limits that are over $300,000. However, that’s beyond what most families need. It’s important to remember that you don’t want to add more funds than you expect your child (or children) to use for qualified learning expenses. Anything withdrawn after they finish their schooling will be taxed as income and will be subject to a 10% tax penalty. To avoid that penalty, you can transfer leftover funds into the 529 savings account of another child. Note: A postgraduate program is a qualified expense, as is $10,000 per year for K-12 tuition.

Related: How much do I need to save for college?

How much do I need to start a 529 plan?

Some plans require a minimum deposit to open a 529 account, and many require each deposit to be of a certain size. More and more plans, however, are starting to lower or remove these minimum requirements if you set it up in certain ways, like with automatic payroll or bank account deposits. 

529 plan withdrawal rules

In order to get the most out of your 529, you should plan to take tax-free withdrawals only. That’s not always easy, because the withdrawal rules for 529 college savings plans can be difficult to understand. Each state is different, and many factors go into what and how much is qualified for the tax-advantaged status. It’s also important to keep records of any payments you want to cover with your 529 savings plan. That way, if any payments are questioned, you can prove that they are qualified. The maximum you can withdraw is the difference between the total cost of attending the school and any grants, scholarships, and tax-free assistance. If you are applying the money to K-12 tuition, however, the yearly maximum is $10,000.

Technically, you can withdraw any amount from your 529 plan whenever you want. However, only distributions used for qualified expenses will be tax free.

What qualifies for tax-free distribution?

It may vary by state, but generally speaking, here are the expenses that qualify for tax-free 529 withdrawals:

  • Tuition for colleges or universities
  • Tuition at trade schools
  • Postgraduate or doctorate program
  • Up to $10,000 per year for private or public K-12 tuition
  • Room and board (up to a limit)
  • College class fees
  • Books, computers, and materials

There are costs that may seem to be related to learning expenses that aren’t covered. Insurance payments, travel expenses, smartphones, and monthly gym memberships do not qualify. If you have any questions, it’s important to talk to a financial services professional.

529 plan withdrawals not for education.

If you go over the amount you can withdraw in a year or spend the funds on nonqualified expenses, it will not only be taxed as income, and it may also be subject to a 10% penalty. There are some exceptions, but it’s best to make sure you fully understand how much you can withdraw each year. Consult a tax professional or an agent to fully understand your 529 and its limitations. 

When should you withdraw funds?

You should always withdraw the funds in the year that you paid for the qualified expenses. For example, if you pay for the second semester of a school year in December, even if the classes don’t start until January, that amount is subject to the previous year’s withdrawal calculation.

If you would like to set up a 529 college savings plan, our experienced financial services professional can help. We offer plans for 26 different states and can help you choose the one that best suits your and your beneficiary’s needs.

Related Content

Contact a NYLIFE Securities Registered Representative

A New York Life financial professional can help determine what’s right for you.

 1 National Center for Education Statistics, “Tuition Costs of Colleges and Universities,” U.S. Department of Education, 2021.

Investments are offered through NYLIFE Securities LLC (member FINRA/SIPC), a Licensed Insurance Agency and a New York Life company.