529 Plan Contribution Limits 2011

A 529 plan is a college saving plan used to help parents pay for the ever increasing cost of college tuition. Unlike other college savings strategies, there is no insurance to buy and there are no income limitations for either parents or children.

The 529 savings plan works a lot like a 401(k) plan. Money gets contributed into the 529 account where it can be invested in various financial securities including mutual funds and index funds. Funds invested in a 529 plan grow without taxes. That is all money invested into a 529 savings account grows tax-deferred. Money can be withdrawn tax-free to pay for college expenses.

The main difference between a 401(k) and a 529 plan is that 401k plans offer a way to make pre-tax contributions, which means that no taxes are paid on money invested into a 401k retirement plan. There is no such federal income tax deduction for 529 plan contributions available. However, many states offer residents who use the home state 529 plan a state income tax deduction.

You can have a 401k plan and a 529 plan because they are not related, just like you can invest in an IRA and 401k both at the same time.

Every one of the 50 U.S. states have at least one 529 plan available. Many states have multiple 529 plan offerings.

The quality of 529 plans varies widely from state to state with some states having done a much better job creating a low-cost college savings plan than others. The website savingforcollege.com offers ratings from one graduation cap to five graduation caps for each 529 plan offered.

If you can figure out how to open a 529 plan account and setup an automatic investment or one-time investment yourself, be sure to avoid the advisor-sold 529 plans which have much higher fees and commissions that can eat into your college investment account returns.

There is no requirement to use the plan from your home state. Anyone can use any state plan and any state plan can be used to pay for expenses at any college. If your home plan is not a good one and there is no tax deduction offered, then use a better 529 plan from another state.

2011 529 Plan Contribution Limits

The limits on contributions to 529 plan have not gone up for 2011. That means that you can contribute the same amount to a 529 plan in 2011 that the 529 plan contribution limits for 2010 allowed.

Up to $13,000 can be contributed to a 529 plan without triggering any gift taxes. Otherwise, the contributions are limited only by the maximums set by each plan.

Remember that married couples can each contribute $13,000, so two spouses could contribute $26,000 altogether into a each child's 529 college plan.

Income limits for 529 plan contributions

There are no income limits for contributing to a 529 plan. The only limit on contributions is how much can be invested without triggering estate taxes.