Income limits for 529 tax deduction?
Many tax-advantaged savings accounts have income limits that determine contribution eligibility. There are no income limits for 529 plan contributions.
Many tax-advantaged savings accounts have income limits that determine contribution eligibility. There are no income limits for 529 plan contributions.
Although contributions to 529 plans do not provide federal tax deductions, many states offer tax benefits such as deductions or credits for contributions. These plans allow for larger contributions, which can help high-income individuals save significant amounts for college expenses.
Contribute more during high-income years
There's no way to time your 529 plan contributions to minimize federal taxes. However, if your state offers an income tax deduction for contributing to its plan, consider contributing as much as possible in your high-income years.
529 tax deductions by state
Four states that do charge income tax but do not have a 529 state tax deduction: California, Hawaii, Kentucky, and New Hampshire. There are no federal tax deductions for a 529 plan, but some states offer deductions for in-state plans.
Lifetime maximum: The 529 transfer is subject to a lifetime maximum of $35,000 from a 529 plan account to a Roth IRA. Roth IRA contribution limits still apply. For 2023, those limits are $6,500 per year if the beneficiary is under 50 and $7,500 per year for those over 50. These limits are subject to change every year.
529 gift tax contribution limits
In 2023, you can gift up to $17,000 (or if you're married and file taxes jointly, up to $34,000) per recipient without those contributions counting toward your lifetime gift tax exemption.
Grandparents can open their own 529 accounts for grandchildren or contribute to parent-owned accounts, but owning your own account can provide tax benefits. Money in a grandparent-owned 529 plan doesn't count against the grandchild's eligibility for need-based financial aid on the FAFSA.
One of the main drawbacks of saving in a 529 plan is that you owe a penalty if you use the funds for an ineligible expense. If you do need to withdraw funds or use them for noneducation-related expenses, you'll incur a 10% penalty and owe taxes on any investment gains.
With the new regulations, which go into effect in 2024, 529 plan account owners or beneficiaries can roll over 529 funds into a beneficiary-owned Roth IRA owned tax-free and penalty-free.
Can you deduct food expenses from 529?
Food expenses and meal plans (which fall within the “board” section of room and board) are a frequent use for 529 savings because of the ease of documentation. The funds can be used to buy groceries and other meals, so long as proper documentation of the receipts is maintained.
You would lose out on federal financial aid. Since a 529 plan could reduce the amount of federal aid your child would qualify for, they may miss out on receiving federal Direct Loans or Direct PLUS Loans or grants, like the Pell Grant or Federal Supplemental Educational Opportunity Grant.
With scholarships, educational assistance and military academy attendance, you can withdraw up to the amount of the scholarship benefit you or your child received from the 529 plan and avoid the 10 percent penalty. You will, however, still have to pay taxes on the earnings portion of the withdrawal.
If you use funds from a California 529 plan account for non-qualified purposes, the earnings portion of withdrawals will be taxed as ordinary income and may be subject to a 10% additional federal tax, as well as a 2.5% additional income tax in California.
What Happens to 529 Money When a Child Turns 21? 529 accounts owned by parents stay in the parents' control so long as they'd like.
If assets in a 529 are used for something other than qualified education expenses, you'll have to pay both federal income taxes and a 10% penalty on the earnings.
The new rules for 2024, however, that will enable account holders to transfer up to $35,000 of unused 529 savings to a Roth IRA retirement account for their child may put some families' minds at ease and encourage more parents to maximize tax advantaged tools for college savings.
There is a special rule in the Internal Revenue Code (IRC) specifically for 529 plan contributions (and select other qualified tuition programs). It allows a gift giver to make a lump sum contribution of up to five times the annual gift tax exclusion and spread it over five years.
The rule is simple. Multiply your child's age by $2,000. That tells you how much you should have saved already at that specific age to be on track to cover 50 percent of college costs. For instance, if your child is seven years old, you would multiply $2,000 by seven and come up with $14,000.
If a 529 still has leftover funds after all of the above options, and there really is no chance that it will be used for educational expenses, it is possible to go ahead and take a distribution from the account. A 10 percent penalty will apply and taxes will be paid on any earnings.
Can you make a 529 contribution in 2023 for 2022?
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.
For in-state, four-year, public college: minimum $300 per month. For out-of-state, four-year, public college: minimum $500 per month. For private, non-profit, four-year college: minimum $650 per month.
While a 529 owned by a grandparent (or other third party) for the student's benefit has never been reported on the FAFSA, a withdrawal will no longer be considered untaxed income the student receives, meaning it will not negatively affect student aid.
529 Plan Estate Planning Benefits
Some financial professionals advise grandparents to contribute to a 529 plan as part of an estate planning strategy. In most cases, you have to consider the Generation Skipping Transfer Tax (GST) when leaving an inheritance to a grandchild.
Contributions to a 529 are after-tax and not federally tax deductible. However, if you invest in your own state's 529 plan or if your state is a "tax parity state," you may benefit from state income tax deductions on contributions or state tax exemptions on withdrawals.
