If you're planning to put a child or another loved one through college and you live in North Carolina, you should know about the state's 529 college savings plan. Investments in this account grow free of federal and state income taxes, and all withdrawals used for qualified higher education expenses are exempt from federal and state income tax. However, contributions made to the plan are not deductible from your income for state tax purposes.
Through this plan, family members and friends can contribute to a child's college fund. Since January 1, 2018, 529 accounts can also be used for expenses at an elementary or high school. College plan money must be used for qualified expenses such as tuition and fees, room and board (with certain limitations), books, supplies, and any equipment required for enrollment or attendance. The maximum amount that can be saved for a single beneficiary is $500,000.
U.S. residents may participate in 529 plans for a state in which they do not live, but they could lose in-state tax benefits by doing so.
Investing in the Plan
The NC 529 Plan, like other such state plans, is named after the numbered section of the Internal Revenue Service code that authorized states to create them. Participants in the North Carolina plan have several investment choices:
- A federally insured deposit account provided by the State Employees’ Credit Union
- Vanguard Age-Based Investment Options
- Vanguard Individual Investment Options
Contributions to and interest earned in the deposit account are guaranteed by the credit union and insured by the National Credit Union Administration.
The latter two choices consist of index funds and other funds managed by Vanguard Group Inc. There are three age-based options that are also weighted among investment choices based on investors' desired risk level: aggressive, moderate, or conservative. As a child ages, the balance of investments among equity funds, bond funds, and short-term reserves are automatically changed on or near the beneficiary's birthday. Generally speaking, the younger the beneficiary, the higher the percentage of stocks in the investment blend, and the lower the risk level, the lower the percentage of stocks. All three age-based options end up with most or all of the money invested in bonds or short-term reserves.
The individual investment options are not rebalanced according to the beneficiary's age. There are nine choices of portfolios to choose from, five of which consist of multiple funds. The five multi-fund portfolios differ in terms of risk: from aggressive growth to a focus on generating income. The four single-fund portfolios seek to match the return of a stock or bond index or accumulate interest.
Fees and Expenses
The deposit account is subject to an annual administrative fee of 0.25% of the invested amount. The Vanguard options are subject to annual administrative fees and investment expenses totaling 0.30%-0.32% of the invested amount. Returns are not guaranteed, and investments made in the Vanguard plans could lose money.
529 Plan vs. Other Savings Accounts
North Carolina residents should also explore whether it would be more beneficial to invest in another type of account for college expenses, such as a Coverdell Education Savings Account or Uniform Transfers to Minors or Uniform Gifts to Minors custodial account.
Consult with a financial advisor or a similar professional about which plan is likely to give you the greatest benefit.
Gift Tax Exemption
North Carolina residents can contribute $75,000 in one year ($150,000 for a married couple filing jointly) per beneficiary without incurring a federal gift tax. However, the donor or donors can not make any additional gifts to that beneficiary for five years. Alternatively, a single donor can give up $15,000 a year every year—and a married couple can contribute up to $30,000—without incurring the gift tax.
Any plan withdrawals that are used for something other than qualified education expenses are subject to federal and state income taxes as well as a 10% federal tax penalty.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.