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529 Plans

High Limits on 529 Plan Contributions

Most states let you stash as much as you want into their college-savings plans, but watch out for gift-tax limits.

Is the maximum that parents, grandparents, friends, etc., can put in a 529 plan each year $3,000?

Actually, the maximum contribution is much higher -- so high that it isn't really an issue. The specifics vary by state, but most states let anyone contribute as much as they want, as long as the beneficiary has less than $230,000 to $310,000 in that state's plan.

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But a person's contributions can be limited by the gift-tax laws. You can only give up to $12,000 to each person in 2008 without being subject to gift taxes (married couples can give $24,000 to each person).

However, there is an exception for 529s: You can make five years' worth of contributions in one year (totaling $60,000 in 2008) without being subject to gift taxes, as long as you don't give that person any other money within the five years.

This can be a great way for grandparents to get a large sum of money out of their estate while still maintaining ultimate control over the beneficiary (they can switch beneficiaries to another eligible family member at any time). See How Can We Help Our Grandkids Pay for College? for more information about the gift-tax rules.

The $3,000 limit you're thinking about may refer to your state's tax rules. Residents of about half the states can get a state income-tax deduction if they contribute to their own state's 529 plan. Those limits vary by state. Some let you deduct your full contribution, regardless of the size. Others, like Montana, only let taxpayers deduct up to $3,000 in 529 contributions per year ($6,000 for joint filers). New York allows deductions of up to $5,000 per year ($10,000 for joint filers).

For details about each state's maximum contributions and tax rules, see Savingforcollege.com (especially the "Compare 529 Plans" tool). For more information about 529s and a list of our favorite plans, see Find the Best 529 Plan. Also see our Paying for College center for college-savings advice.

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