When you hear about 529 college savings 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? You might be surprised to find out that’s an option too.
In this article, we’ll explain who can contribute to a 529 plan, what to know about contributing, and why you should consider using one in the first place.
How 529 Plan Contributions Work
A 529 plan is not like other types of investment accounts which limit who can contribute. With 529s, anyone can put money into 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 college savings plan.
Family friends, grandparents, and other relatives can also contribute to a 529, so the burden of saving for college isn’t placed solely on the parent. A parent might, for example, ask relatives for college savings contributions in lieu of toys or other gifts for birthdays or holidays. The child listed as a beneficiary on the plan can also contribute to their own 529. For instance, they might decide to put extra money they earn from working or receive as gifts toward their college savings.
The long and short: Any friend or relative—or even the child beneficiary themself—can contribute to your child’s 529 plan if they choose.
Answers to Common Questions About 529 Plan Contributions
Each state has its own 529 plan options, so the contribution process might be slightly different depending on the plan. But generally, you can make contributions either electronically or by check. If you’re thinking about contributing to a friend or family member’s 529, ask the beneficiary’s parents or guardians about your options. They can offer insight on the best ways to give.
Are there contribution limits to a 529 plan?
No, there’s not a specific annual contribution limit for a 529 plan, but there’s an aggregate limit that varies depending on the state. The aggregate limit usually ranges from $235,000 to $550,000. For instance, you can contribute up to $400,000 total to a 529 in Massachusetts.
Are there age restrictions for a 529 plan?
There is no age limit or restriction on when people can start contributing to a 529 plan. For example, a couple currently expecting a child could 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.
There’s also no restriction for graduate students. Graduate students or adults going back to school can open a 529 and make contributions on their own or ask people to contribute to it. The balance doesn’t need to be applied solely toward an undergraduate education; it can also go toward a graduate or professional degree program.
Are 529 plan contributions tax deductible?
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 your 529 contributions, capped at $1,500 annually. But the rules about tax deductions vary by state, so it’s important to do your research before contributing.
The other potential tax ramifications to be aware of with 529 contributions are related to the gift tax established by the IRS. In 2024, you can give up to $18,000 per individual or $36,000 per couple without worrying about paying a gift tax. Fortunately, there’s a superfunding exception to the gift tax for 529 plans if you’d like to contribute more money.
The superfunding exception for 529s allows you to give a one-time lump sum amount equal to or less than the five-year gift tax total. So for 2024, that amount would be $90,000 for individuals or $180,000 for joint gifts from married couples. If you decide to give $90,000, for example, you’ll need to complete IRS form 709 for the next five years to ensure you don’t pay taxes on your gift.
Joanne E. Burke, CFP® of Birch Street Advisors, recommends contributing a lump sum instead of spreading out contributions over several years because “the 529 plan balance is able to grow more significantly due to the additional compounding of tax-free growth.”
How to contribute to a student’s 529 plan
In some states, anyone contributing to a 529 plan can get a tax deduction or credit, depending on what their state offers. For example, in Indiana, you can receive a tax credit worth 20% of your 529 contributions, capped at $1,500 annually. But the rules about tax deductions vary by state, so it’s important to do your research before contributing.
The other potential tax ramifications to be aware of with 529 contributions are related to the gift tax established by the IRS. In 2024, you can give up to $18,000 per individual or $36,000 per couple without worrying about paying a gift tax. Fortunately, there’s a superfunding exception to the gift tax for 529 plans if you’d like to contribute more money.
The superfunding exception for 529s allows you to give a one-time lump sum amount equal to or less than the five-year gift tax total. So for 2024, that amount would be $90,000 for individuals or $180,000 for joint gifts from married couples. If you decide to give $90,000, for example, you’ll need to complete IRS form 709 for the next five years to ensure you don’t pay taxes on your gift.
Joanne E. Burke, CFP® of Birch Street Advisors, recommends contributing a lump sum instead of spreading out contributions over several years because “the 529 plan balance is able to grow more significantly due to the additional compounding of tax-free growth.”
How to Contribute to a Student’s 529 Plan
As mentioned, contribution methods will vary by plan, but in general, there are two main ways to contribute to a 529 plan:
1. Direct Contribution to a 529 College Savings Plan
The account holder, often the beneficiary’s parent, can share a link to a website where people can contribute. This link is safe for them to send out and doesn’t include any identifying details about the student. To contribute to a 529 via a link, you can generally input your bank account details or mail in a check. Some 529 plans may even let you contribute with a credit card, though not all providers do.
2. Open a New 529 College Savings Plan
The second option is opening a new 529 plan and naming the student as the beneficiary. If you go this route, you can decide what to invest the 529 proceeds in. Opening a new plan may be a worthwhile strategy if you plan to contribute regularly. It 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 unrelated to the original beneficiary, then that person 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, ensure the family of the beneficiary knows how much money you’re contributing. The aggregate 529 limit applies to the balances across all the 529 accounts held in the beneficiary’s name, not just in one account.
Why Save Using a 529?
You might wonder if contributing to or opening a 529 for someone besides your own child is worth it or if putting that money in a savings account is better. Remember that one of the main benefits of a 529 is you can invest the funds in the stock market, which you can’t do with a regular savings account.
Historically, investment gains have outpaced interest earnings on savings accounts, though it’s important to note that past returns don’t necessarily equate to future returns. If you have a long time horizon to invest, though, putting money into a 529 college savings plan vs. a savings account is generally a wise choice.
The Bottom Line
Saving in a 529 is a great way to help offset the cost of college. If you’re heading to college soon and looking for additional funding besides your 529 or federal student loans, private student loans could help fill the gap. Learn more about ELFI’s undergraduate and graduate student loans and prequalify today to see what rate might be available to you.
