The cost of tuition continues to rise; albeit at a lower rate than in previous years. With that in mind, we thought it would be important to highlight a special provision for contributing to a 529 plan. Those that haven’t been saving for college may still benefit from this special relief.

What’s a 529 plan?
This tax-free savings account is sponsored by a particular state or group of states that and is used strictly for college expenses. Most states also offer a state tax deduction for contributing to the plan. For instance, a married couple filing jointly with a New York State sponsored plan could generally deduct up to $10,000 of their contribution; married filing separate would be up to $5,000 for the year. The funds must be used to pay for college tuition and other eligible expenses or the account holder will face tax penalties.

Special provision to contribute more than the annual gift tax exclusion
A special rule for section 529 plans allows an individual to give up to five years’ worth of plan contributions at one time, which means a single parent can contribute up to $70,000 at once (the $14,000 gift tax exclusion times 5 years). Thus, a married couple could contribute $140,000 at one time for each child’s future education without any gift tax consequences.

Should I open one 529 plan for all of my children?
While it is possible to have one 529 account for many children to transfer any unused funds from one child to another, it’s not recommended. Rather, setup separate 529 plans for each child since the investment allocation should vary based on the child’s age and it’s easier from a bookkeeping standpoint. Furthermore, financial aid eligibility can be difficult when there are multiple children under one plan with an exorbitantly high balance.

More tax questions? Browse answers or ask your 529 plan questions online.