Answers to Questions about Contributions to a 529 Plan

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By Mark Kantrowitz

July 17, 2020

During our webinar about How to Reach Your College Savings Goals with a 529 Plan, participants asked dozens of questions. Here are the answers to questions about contributions to a 529 plan.

Can I fund a 529 plan tax-free by directly depositing it from my payroll?

Although several state 529 plans allow automatic contributions via payroll deduction, the contributions are made with after-tax dollars, not before-tax dollars.

Some states provide employers with tax breaks for matching employee 529 plan contributions.

If a grandparent contributes to a parent-owned 529 plan, does the contribution count as a gift for tax purposes? Does it count as part of the $15,000 gift tax exclusion?

Yes. Contributions from a grandparent to a parent-owned 529 plan count as a gift to the 529 plan’s beneficiary. Such gifts count as part of the annual gift tax exclusion, which is $15,000 in 2020. 

Grandparents can work around this limitation by giving up to twice the annual gift tax exclusion amount (i.e., $30,000) as a couple. They can also use 5-year gift tax averaging to treat their gift as occurring over a 5-year period. Five-year gift tax averaging allows a grandparent to give up to $75,000 per beneficiary and the grandparents to give up to $150,000 per beneficiary as a couple.

Is 529 money out of your estate?

Contributions to a 529 plan are immediately removed from the contributor’s estate, with one exception.

Giving a lump sum contribution that is in excess of the annual gift tax exclusion through five-year gift-tax averaging is treated as though the contribution is made over a five-year period. This applies not just to the gift-tax exclusion, but also to the removal of the contribution from the contributor’s estate. For example, if the contributor were to die in the third year of the five-year period, only three-fifths of the contribution will be removed from the contributor’s estate. 

How much would you have to save per year in a 529 plan to cover the complete cost of college?

The amount to save per year depends on the type of college, since an in-state public college is less expensive than an out-of-state public college, which is less expensive than a private college. 

Normally, recommended monthly contributions are based on the one-third rule, which suggests that parents should aim to save one third of future college costs, which is about the same as the current cost of a four-year college education. The other two-thirds will come from income, financial aid and loans

This leads to the recommendation to save $250 per month from birth for a child born this year who will enroll at an in-state public college, $450 per month for an out-of-state public college and $550 per month for a private college.To save the complete cost of college, save three times as much per month: $750 per month from birth for an in-state public college, $1,350 per month for an out-of-state public college and $1,650 per month for a private college.

A good place to start:

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