529 plan contribution and withdrawal limits.

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


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 our children to be successful in today’s job market. Unfortunately, college costs continue to rise, 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 Your contributions are allowed to grow tax-deferred, much like in a 401(k) and can even be withdrawn tax free when they are used on qualified expenses.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. 

Tax advantages of a 529 plan

You may wonder how a 529 savings plan is different from just saving for college in a savings account. It all comes down to taxes. With a 529 plan, you contribute after-tax money in an investment account. With other taxable investments, you would have to pay taxes on any gains made, but with a 529 plan that money can be used for qualified educational expenses tax free.2 However, it’s important to understand each state’s distribution rules to avoid taxes and penalties.

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 one state does not necessarily mean you have to choose that state’s 529 plan. Through NYLIFE Securities, you have access to 26 different plans from 26 states, and we can help you choose the one that will best meet your child’s future needs.

Is it better for a parent or grandparent to own a 529 plan?

Generally, it’s better for a parent to own the 529. For now, plans owned by a grandparent or other person may affect the student’s ability to get Federal Student Aid (FAFSA) and other need-based financial aid. New legislations in the future may change this.

529 plan contribution limits

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 those to come right out of your paycheck, or you can set up a direct deposit with your bank. No matter how you choose to fund your 529, here are some things to keep in mind:

How much can you put in annually?

While there is technically no yearly limit, to get the most benefit from a 529 plan, you can contribute up to $16,000 per individual per year tax-free by using the annual gift tax exclusion. Grandparents and other family friends can do the same. You may be able to contribute more by using a “5-year gift front-load” rule, so be sure to chat with your tax professional to understand how any decisions can affect your taxes.

Maximum contribution limits

Each state is different, but many have total contribution limits 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 their schooling is done will be taxed as income and subject to a 10% tax penalty. To avoid that penalty, you can transfer leftover funds into the 529 savings account of another child.

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 good records of any payments you want to cover with your 529 savings plan, so you can prove that they are qualified.

How much can you withdraw each year?

Technically, you can withdraw any amount from your 529 plan whenever you want. However, only qualified distributions will be tax-free. Any nonqualified funds withdrawn will count as income and be taxed with a penalty (see below).

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 a trade school
  • Postgraduate or doctorate programs
  • 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 other costs that may seem to be related to learning expenses aren’t covered. Insurance payments, travel expenses, smartphones, and monthly gym membership do not qualify. If you have any questions, it’s important to talk to a financial professional.

Nonqualified withdrawals come with a penalty

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?

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, it’s still subject to the previous year’s withdrawal calculation.

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

Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

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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. 2021, “Tuition costs of colleges and universities.” U.S. Department of Education.

2 The earnings portion of the withdrawals will be subject to ordinary taxes plus a 10% penalty if they are used for noneligible expenses. 

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