Tax Benefits of North Carolina's 529 College Savings Program
How to claim an income tax deduction for the plan
If you're planning to put a loved one through college in the future and you live in North Carolina, it is important for you to know about the many tax advantages available to residents who contribute to the state's 529 college savings program. The ability to afford college tuition can make the most even-keeled parents anxious, but knowing the perks of saving for higher education well ahead of time can put your mind at ease.
If enough money is saved through this vehicle, there is less stress at admissions time about applying for financial aid or searching for scholarships. Investments made in these accounts grow free of federal and state income taxes. In addition, all withdrawals used for qualified higher education expenses are exempt from federal and state income taxes. Although many states offer a tax deduction for contributions, North Carolina does not have this incentive in place.
Through these tax-advantaged plans, family members and friends can make regular contributions to a child's college fund. Over the years, with regular contributions and the benefit of compound interest, the plan can grow significantly to provide for the child's eventual educational expenses.
Complete and current information about North Carolina’s National College Savings Program can be found at http://nc529.org/. With easy online or paper enrollment offered directly through the state, you can start saving with as little as $25, with no enrollment fees or sales charges added on to open an account. Annual asset-based fees and fund expenses are comparatively low, as is the monthly administrative fee. Future contributions can be made regularly or periodically, also with a minimum of only $25.
Other family and friends can contribute, but your fund can only accept contributions until all account balances in the NC 529 plan for the same beneficiary reach $450,000. Contributions are generally considered gifts to the account beneficiary for federal tax purposes.
The NC 529 Plan has many options to fit any investment strategy including Vanguard funds with age-based and static options, as well as a federally-insured deposit option through the State Employees Credit Union. Whether you want a conservative bond fund, a high-risk/high-reward growth fund, or an age-based fund that adjusts as your child gets closer to college, you’ll get the added benefit of tax-free savings. So, whether you’re saving for a toddler or a teenager, the NC 529 Plan gives you the tools you need to start building a solid foundation for success.
Q&A About the NC 529 College Savings Plan
Question: What can the money in an NC 529 Plan account be used to pay for?
Answer: Qualified higher education expenses are those such as tuition, room and board, a computer and related equipment, books, fees and other required equipment used while enrolled.
Question: What if my child attends an out of state school?
Answer: Savings in your NC 529 Plan account can be used at virtually any college in the country; however, the school must be an “eligible higher education institution,” and that is determined by whether or not the school is eligible to participate in the financial aid programs of the U.S. Department of Education. To find out if the schools your student is considering are eligible, visit https://fafsa.ed.gov/FAFSA/app/schoolSearch. The institution also must provide programs of study that award an associate’s, bachelor’s, graduate or professional degree or other postsecondary credential.
Certain vocational or foreign institutions may also be eligible institutions.
Question: What happens to the account if my student gets a scholarship, attends a military academy, or doesn’t attend college?
Answer: The money in the account remains yours. You can transfer money to another account or name a new beneficiary as long as the new beneficiary is a member of the family. Remember that even substantial scholarships may not cover all qualified education expenses such as equipment or room and board, so your savings may still be needed. If you don’t use the remaining money for education, you can withdraw it, but may be required to pay state and federal taxes on your earnings and an additional federal income tax penalty of 10 percent.