Who Can Contribute to a Student’s 529 Plan?May 30, 2022
When you hear about 529 college saving plans, it’s usually in the context of a parent saving for their child’s college education. But what if someone other than a parent wants to open or contribute to a 529?
In this article, we’ll explain who can contribute to a 529 plan, how to make contributions and why you should consider using one in the first place.
Who can contribute to a 529 plan?
A 529 plan is not like other types of investment accounts where there are limits on who can contribute. With a 529 plan, anyone can put money in the account, even if they’re not related to the beneficiary. For example, if your best friend has a baby, you can contribute to their child’s 529.
Family friends, grandparents, and other relatives can also contribute to a 529, so the burden of saving for college isn’t solely on the parent. Parents who want fewer toys for their child can ask that people contribute to a 529 in lieu of buying more physical gifts.
The child can also contribute to their own 529. This is a great place to keep extra money they earn from working or if they receive birthday or holiday checks from generous relatives.
Are there contribution limits to a 529 plan?
There is no specific annual contribution limit to a 529 plan. However, there is an aggregate limit that varies depending on the state. The total limit ranges from $235,000 to $550,000, depending on where you live. The total limit includes both contributions and earnings, which may occur if the 529 is invested in the stock market.
Is there an age limit to a 529 plan?
There is no age limit or restriction on when people can start contributing to a 529 plan. For example, a couple who is currently expecting a child can ask that people donate to the 529 instead of buying gifts for a baby shower. Parents with a child about to head off to college can ask for 529 contributions instead of graduation gifts.
Graduate students or adults going back to school can also open a 529 and have people contribute to it.
Are contributions eligible for tax deductions?
In some states, anyone who contributes to a 529 plan can get a tax deduction or tax credit, depending on what their state offers. For example, in Indiana, you can receive a tax credit worth 20% of the 529 contributions, up to $1,000 in total. In some states, only the person who is the account owner will receive the tax break.
The only restriction that applies to 529 contributions is the gift tax. In 2022, the annual amount you can give someone besides a spouse without paying taxes is $16,000 per individual or $32,000 per couple.
However, for 529 plans, there is an exception to the gift tax. You are allowed to give a one-time lump sum amount that is equal to or less than the five-year gift tax total. In 2022, that lump sum limit is $80,000 for individuals or $160,000 for married couples.
To be eligible for the five-year lump sum gift, you’ll have to fill out form 709 with the IRS when you file your taxes. This will ensure you don’t pay taxes on the gift.
Joanne E. Burke, CFP® of Birch Street Advisors, said she recommends that grandparents and other relatives contribute a lump sum instead of spreading out the money over several years.
“The fund balance is able to grow more significantly due to the additional compounding of tax-free growth,” she said. “This, in turn, reduces the total funding amount.”
How to contribute to a student’s 529 plan
There are two main ways to contribute to a child’s 529 plan. First, the account holder, often the parent, can send out a link to a website where people can contribute. This link is safe for them to send out and will not include any identifying details about the student.
To contribute to a 529, you can input your bank account details or mail in a check. Some 529 providers may even let you contribute with a credit card, but not all providers allow this.
The second option is to open a new 529 plan and name the student as the beneficiary. If you go this route, you can decide what to invest the 529 proceeds in. This may be a worthwhile strategy if you plan to contribute regularly. This strategy also allows you more control because you can change the beneficiary at any point.
For example, if the original beneficiary receives a full ride to college, you can change the beneficiary to another person. There is no fee to do this as long as the new beneficiary is a member of the original beneficiary’s family. If they’re not related to the original beneficiary, then they will have to pay income tax and a 10% penalty on the funds in the 529.
If you choose to open a new 529 account, make sure the family knows how much money the account has. The aggregate 529 limit applies to all the 529 accounts held in the student’s name, not just in each account. There is no penalty for exceeding the limit, but you will not be allowed to make extra contributions until the amount has dropped below the limit.
Why you should save in a 529
Some people might wonder if the hassle of contributing to or opening a 529 for someone besides your own child is worth it or if putting the money in a savings account is better. You can use 529 plans to pay student debt, which can be helpful for your child later if they need to take out student loans.
One of the main benefits of a 529 is that you can invest the funds in the stock market, which you can’t do in a savings account. This way, the student can reap the benefits of compound interest, and it also means that your contributions will outpace inflation. If you keep the money in a savings account, the interest rate will not outearn inflation, and the money will actually lose value over time.