IRS Rules for 529 Plans

by Rebecca Lake

Parents who want to start saving for their child's college expenses have a variety of options to choose from, including a 529 plan. A 529 plan is a tax-advantaged account that allows you to invest money for future education costs. The IRS has specific guidelines regarding 529 plan contributions and withdrawals.

Who Can Contribute

All 50 states offer at least one 529 plan and anyone over the age of 18 can contribute, regardless of your state of residence. You can make contributions to a 529 plan on behalf of an eligible beneficiary, regardless of their age. According to IRS Publication 970, an eligible beneficiary includes yourself, your spouse, your child, your grandchild or another family member. As the account owner, you can transfer the account to another eligible beneficiary at any time and continue making contributions. Unlike other college savings vehicles, such as a Coverdell ESA, there are no restrictions based on your income.

Contribution Limits

Contribution limits are determined by each state's 529 plan administrator. As of 2012, some state plans offered lifetime contribution limits as high as $300,000. The IRS does not place any restrictions on lifetime contribution; however, annual contributions may be subject to gift tax or a reduction in their lifetime estate tax exemption if they exceed certain limits. For the 2012 tax year, single filers could gift up to $13,000 to a single individual without incurring gift tax or a reduction in their estate tax exemption. The limit was $26,000 for married couples filing jointly.

Qualified Withdrawals

You can make withdrawals from a 529 plan at any time without incurring a tax penalty as long as you use the money for qualified education expenses. According to the IRS, qualified expenses include tuition, fees, books, and room and board for qualified post-secondary education. Room and board expenses are covered only when the student is enrolled at least half-time and only up to the amount included in the cost of attendance. The student must also be enrolled at an eligible educational institution to qualify. This simply means any college or university that's able to participate in federal student aid programs.

Tax Considerations

If you take money out of a 529 plan for any purpose other than education expenses, the money may be subject to a 10 percent penalty and regular income tax. The 10 percent penalty does not apply if you're withdrawing the money because the beneficiary has died or becomes disabled or receives non-taxable educational assistance such as a scholarship. If you're rolling the money over to a new 529 plan for another beneficiary, the distribution generally isn't taxable as long as the rollover is completed within 60 days.

About the Author

Rebecca Lake is a freelance writer and virtual assistant living in the southeast. She has been writing professionally since 2009 for various websites. Lake received her master's degree in criminal justice from Charleston Southern University.

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