Wealth Insights is our regular financial planning update, generally refreshed on Tuesdays. Wealth Insights provides perspective on financial planning topics to help as you consider options for navigating your financial life.
The amount you can contribute to a 529 plan depends on the plan’s lifetime contribution limit, which is set by individual states. Most states have a lifetime cap of $350,000 or more. When the value of your account reaches the limit, no more contributions can be made to the account. States typically increase their limit every few years. A plan’s lifetime contribution limit is per beneficiary.
If your child receives a full or partial scholarship to college, you can withdraw funds in your 529 account up to the amount of the scholarship each year and use the funds for a non-educational purpose without incurring the 10% federal penalty that would normally apply to the earnings portion of the withdrawal. In order to avoid the penalty, the withdrawal must be made in the same year that the scholarship is received and must not exceed the amount of the scholarship.
A custodial account is an account established at a financial institution for the benefit of a minor child and managed by the parent or another designated custodian. A custodial account is established under a particular state’s Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA).
When you contribute to a 529 plan, you’ll not only help your child, grandchild, or other loved one pay for school, but you’ll also remove money from your taxable estate. This will help you minimize your tax liability and preserve more of your estate for your loved ones after you die. So, if you’re thinking about contributing money to a 529 plan, it pays to understand the gift and estate tax rules.