Once the combined 529 plan balances for the beneficiary’s in-state 529 plans reach a state’s aggregate limit, no additional contributions can be made to any 529 plan administered by that state. The accounts will not be penalized if investment earnings push the balance over the limit, but no additional contributions can be made unless the combined 529 plan balances drop below the limit. For example, this could happen if the investments in the 529 plan drop in value or the 529 plan account owner takes a distribution.
Families may be able to contribute beyond a state’s aggregate limit by contributing to another state’s 529 plan. IRS regulations do not prohibit a beneficiary from having accounts in different states with a combined balance that exceeds a state’s aggregate limit. But, any amount above the state’s aggregate limit must be an appropriate amount to cover a beneficiary’s future higher education needs.
States with the highest aggregate limits
District of Columbia, Idaho, Louisiana, Maine, Maryland, Michigan, Nevada, New Hampshire, New Mexico, South Carolina, Virginia, Washington
Over 30 states offer a state income tax deduction or state income tax credit for 529 plan contributions. In most states, residents must contribute to an in-state 529 plan to be eligible for a state income tax benefit. However, in Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania, contributions to any 529 plan qualify for an annual state income tax benefit.
In Colorado, New Mexico, South Carolina and West Virginia, 529 plan contributions are fully deductible from state taxable income. Other states limit the amount of contributions that are eligible for a state income tax benefit. For example, in Pennsylvania, residents may deduct 529 plan contributions up to the amount of the annual gift tax exclusion ($15,000 in 2019) from Pennsylvania taxable income each year. In Massachusetts residents may only deduct up to $1,000 per year of 529 plan contributions from Massachusetts taxable income.
Some states allow taxpayers to carryforward excess contributions for state income tax purposes. For example, Louisiana, Ohio, Rhode Island, Virginia and Wisconsin allow carryforward of excess contributions for an unlimited number of years. So,
if Ohio parents want to contribute more than their state’s annual limit of $4,000 per beneficiary, they may deduct the excess in future years in increments of $4,000 per year, until the entire contribution amount is deducted. Maryland allows carryforward for up to 10 years, while Arkansas, Connecticut, Oklahoma, Oregon and Washington DC allow it for 4 or 5 years.
But, other states do not allow carryforward of excess contributions for state income tax break purposes. For example, Illinois provides an annual state income tax deduction for joint contributions of up to $20,000, without carryforward of excess contributions. If a married couple were to contribute a lump sum of $75,000 to an Illinois 529 plan using 5-year gift-tax averaging or to contribute $15,000 each to the 529 plans of two beneficiaries, they could only deduct $20,000 from Illinois taxable income. They would not be able to claim a state income tax deduction on the remaining contribution amount in future tax years. This provides a disincentive to making a lump sum contribution.