529 Account Rules to Be Mindful Of
What is a 529 plan? It’s not just another savings account — it’s a tax-advantaged education savings account, and its rules become more flexible and beneficial for families all the time.
The tax benefits of an NC 529 Account give it an edge over other savings options, such as Coverdell Accounts, Roth IRAs, and custodial accounts. Your NC 529 earnings can grow over time and always remain tax-free when used for education expenses. NC 529 Accounts also have fewer restrictions on how much you can save and how you can spend your money.
Sound like a good deal? We know — but before you open an NC 529 Account, study up on these fundamental 529 Account rules. Knowing the details ahead of time will help you reap all the benefits of a 529 plan — without incurring penalties or fees.
Use Earnings on Qualified Education Expenses
The tax advantages of a 529 plan are undoubtedly the biggest draw for families that want to save for college. Earnings withdrawn for qualified education expenses (QEE) are tax-free, so you can invest in your child’s future education and pay less in taxes.
Fortunately, the list of qualified expenses has expanded in recent years as college costs continue to climb. These expenses include college tuition and fees, room and board, books, supplies, and assistive technology for students with learning differences. A new laptop for your college-bound kid is also a 529-eligible expense. And the schools they attend don’t have to be in-state, or even in the country, for the benefits to apply. There are over 400 eligible foreign institutions where you can use your NC 529 funds to pay for a semester abroad!
Other NC 529 eligible expenses include career/technical schools and apprenticeship programs registered with federal or state agencies, as well as K–12 tuition. You don’t have to wait until your child goes to college to use your savings! Plus, recent legislation allows you to use your NC 529 earnings to pay off up to $10,000 in student loans for the account beneficiary and their siblings. Starting in 2024, up to $35,000 of 529 account funds can be rolled over to a Roth IRA without penalty.
529 plans have great flexibility, and you can do whatever you want with your earnings — it’s your money! But if you withdraw funds for non-qualified expenses, you’ll face an automatic 10% federal penalty, additional state and federal income taxes, and a processing fee.
Before you put down a deposit or make a potentially non-refundable purchase, consult a tax professional or give us a call to confirm the expense is qualified. If it’s not, carefully weigh the pros and cons before making a non-qualified withdrawal.
Choose Eligible Beneficiaries – And Change Them If Necessary
Account beneficiaries are often children or grandchildren, but NC 529 Account rules provide much more inclusivity. A beneficiary can be anyone with a valid Social Security number or other Taxpayer Identification Number. You can open an account for the child of a family friend, a niece or nephew, or even a scholarship, trust, or other entity! If you want to save for your own education, you can name yourself as both beneficiary and participant (owner) of the account.
In some scenarios, you may want to change the beneficiary on an existing NC 529 Account. Let’s say your child receives a college scholarship equal to or greater than what you’ve saved, but another child wants to attend a private high school. Simply change the beneficiary to the family member who will benefit the most from the funds.
Keep in mind that to change a beneficiary without penalty, the new beneficiary must be a family member, which includes siblings, in-laws, cousins, and more. You can learn more about beneficiaries on page 8 of the NC 529 Program Description. Download a copy of the program description to understand the ins and outs of 529 account rules.
Know the Minimum and Maximum Contribution Limits
While anyone can contribute to an NC 529 Account (and they make for wonderful gifts), there are limits to how much an account can hold and how much can be contributed annually without incurring a gift tax. The maximum amount an individual can contribute per beneficiary in 2023 is $17,000 ($34,000 for married couples contributing jointly) before incurring a gift tax.
The maximum contribution to an NC 529 Account is $540,000 for a single beneficiary. The minimum contribution to an NC 529 Account is $25, making it simple for anyone to set up an account and make regular contributions.
NC 529 Is Here to Guide You
As North Carolina’s National College Savings Plan, the NC 529 Plan strives to help all families reach their education goals. Whether your child, you, or a relative is the beneficiary, NC 529’s tax-advantaged savings plan is key to a student’s future success — minus the financial stress!
Check out the NC 529 program highlights and review your investment options to help you make a plan that meets your needs and fits within your budget. Then take the first step — and open the door to a brighter future by opening an NC 529 Account.