529 college savings plans do not have contribution deadlines. You may contribute to a 529 plan at any time throughout the year, and you do not have to stop making contributions once the beneficiary reaches a certain age.
However, some families may want to complete their annual contributions by a specific date in order to maximize state income tax benefits and the annual gift tax exclusion because you can only deduct contributions made within the 12 months of the tax year you’re filing taxes for. This means that 529 plan contributions should be part of your year-end planning.
How a 529 Plan Works
529 plans are tax-advantaged college savings accounts sponsored by each state. When you invest in a 529 plan you can name a beneficiary and the money you invest will grow on a tax-deferred basis. If the beneficiary withdraws from the account later for qualified educational expenses then those withdrawals are not taxed. If you withdraw funds for non-qualified expenses or costs then the money is taxed at the ordinary income level.
529 plans were created in order to encourage parents to save more for their child’s college education, especially as tuition expenses continue to rise. Qualified expenses can include tuition or room and board.
When Can You Contribute to a 529 plan?
Families may contribute to a 529 plan whenever it is most convenient for them. A 529 plan account owner can schedule automatic recurring contributions or make a lump sum deposit at any time throughout the year.
Most 529 plans experience a seasonal spike in contributions during the winter holiday season. In recent years, 529 plans have adopted programs that make it easy for grandparents and other loved ones to give a gift of college savings. Gift contributions to 529 plans managed by Ascensus College Savings more than doubled from 2016 to 2018, from $109 million to $246 million. A contribution to a child’s 529 plan is more meaningful and lasting than a tangible gift.
Another reason 529 plan contributions may increase toward year-end is that most estates end their tax year on December 31. 529 plan contributions are considered gifts for tax purposes and may qualify for the annual gift-tax exclusion. In 2022, individuals may gift up to $16,000 ($32,000 if married) per beneficiary with incurring gift taxes or affecting their lifetime gift tax exemption amount of $12.06 million. Grandparents looking to reduce exposure to estate tax may contribute to a grandchild’s 529 plan as part of an estate planning strategy.
Contribution Deadlines for State Income Tax Benefits
529 plan contributions are not deductible from federal income tax, but over 30 states offer a state income tax deduction or state income tax credit for 529 plan contributions. In most states, the deadline to qualify for an annual state income tax benefit is December 31, but six states have contribution deadlines in April. If a family misses their state’s deadline, their contribution should qualify for a state income tax break in the following year.
In all but four states, there is a limit on the amount of 529 plan contributions eligible for a state income tax break. 529 plan contributions are fully deductible from state income tax in Colorado, New Mexico, South Carolina and West Virginia. Some of the states that limit contributions allow taxpayers to carry forward excess contributions and claim a state income tax deduction or credit in future tax years.
Prepaid Tuition Plan Deadlines
Unlike 529 college savings plans, prepaid tuition plans typically have specific enrollment periods with contribution deadlines. Enrollment periods vary by state, but winter and spring deadlines are the most common. Prepaid tuition plans allow families to lock in future college tuition costs at today’s prices. Most prepaid tuition plans are designed to save for an in-state public 4-year college or university.
One exception is Private College 529, which can be used to save for nearly 300 participating private colleges. Families can contribute to Private College 529 throughout the year.
Coverdell ESA Contribution Deadlines
Families who meet certain income requirements may use a Coverdell Education Savings Account (ESA) to save for future education costs. Distributions from a Coverdell ESA are tax-free when the funds are used to pay for college or a broad range of K-12 expenses. Annual contributions to a Coverdell ESA cannot exceed $2,000 per beneficiary, and contributions must be made by the federal tax filing deadline. A Coverdell ESA will not accept contributions once the beneficiary reaches age 18 and distributions must be made by the time the beneficiary reaches age 30.
Timing of 529 Plan Withdrawals
While there aren’t any 529 plan contribution deadlines, there are some on the other side when you distribute funds. You must withdraw funds for qualified expenses during the same calendar year that the expenses are incurred. So you cannot withdraw funds in December and expect to use those funds to pay for January’s college expenses.
This is a really important distinction that can save you a bunch of money in taxes. If you withdraw funds at the wrong time then the distribution won’t be considered a qualified one, triggering an ordinary tax event on that money.
The Bottom Line
While there are no set-in-stone 529 plan contribution deadlines, you may want to make sure you contribute at the right time for tax benefits. You don’t want to contribute after the new year begins if you want to take advantage of certain benefits for the current tax year. The end of the year is a good time to make sure your contribution amount lines up with your goals.
Frequently Asked Questions (FAQs)
How much can I contribute to a 529 plan?
There are no yearly limits to how much you can contribute to a 529 plan. Instead, the amount you can contribute is maxed out at a total contribution for a single beneficiary, depending on what plan you invest in. Typically these amounts range between $350,000 and $550,000 for the life of the plan.
Can you make a 529 plan contribution for the previous year?
No, you cannot make a contribution this year for last year and it counts for the previous tax year like you can with some investment accounts. You can deduct contributions made within the calendar year.
Do I have to make monthly contributions to a 529 plan?
No, you do not have to make monthly contributions to a 529 plan but it is recommended that you contribute as often as you’re able. Making regular contributions can really improve the overall account size for the beneficiary and maximize the dollars that are growing.