The 529 plan is a tax-advantaged college savings plan. Of course, like all plans that offer IRS sanctioned tax savings, there are rules and regulations regarding just how and when a 529 plan may be used. One of these limitations involves how much money you can contribute to a 529 plan in 2021. 529 contribution limits tend to be pretty stable, based mostly on the federal gift tax exclusion amount.
2021 529 Contribution Limits
Unlike IRA plans, where there are new IRA contribution limits, or other child tax credits, there are no income limits for 529 plans. That means that you can contribute to a 529 plan regardless of whether you are a high-income taxpayer or not.
There are, however, still a few kinds of contribution limitations for 529 savings accounts that you want to be aware of.
The first 529 plan contribution limit comes from the 529 plan rules established by each individual plan. Since 529 plans are administered by each of the 50 states, there can be 50 different plan rules. For each plan, there may be both an annual contribution limit and a lifetime contribution limit. In addition, for states that offer a state income tax deduction for 529 plan contributions, there may be a limitation on how much of each year’s contribution may be deducted.
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For example, the State of Colorado has no annual contribution limit, but restricts contributions to a Colorado 529 plan once the account balance hits $400,000. On the other hand, California 529 plans allow contributions until the account balance is $371,000. (Many 529 college savings plan limits are indexed to inflation, or otherwise increase on a regular basis.)
For some taxpayers, the most important 529 plan contribution limitation isn’t actually a 529 plan limit at all. IRS rules state that contributions to a 529 plan are a gift. Therefore, to avoid triggering potential gift tax implications, contributions must be limited to under $15,000 each year, which is the 2021 gift tax limit. A married filing joint couple can contribute up to $30,000 per year, which is considered one $15,000 gift from each person.
Special Gift Tax Rule for 529 Plans
There is a special rule for 529 plans regarding gift taxes. Up to five years of gifts can be made in advance to a 529 plan without triggering any estate tax or gift tax implications. In other words, a single person can contribute up to $75,000 in a single year to an individual’s 529 plan. However, such a contribution is considered an advance on future year’s gifts. Therefore, if one contributes the full $75,000 into a 529 plan, then no additional gifts may be made for five years.
Again, a spouse may contribute the full gift amount as well. In this case, a married couple that files jointly could contribute $150,000 in a single year to a 529 plan in 2021 as long as they do not make any additional gifts to that same person for the next five years.