How Does an NC 529 Tax Deduction Work?

Money in a 529 college savings plan.

For parents with very small children, thinking about dropping them off at college for their freshman year may seem very far away. Thinking about saving money for college may seem even farther in the distance. Yet, young parents today know first-hand how expensive college has become — because they’re probably still paying off student loans from their own educations!

While you may not think you have the money to start a college savings plan right now, this is the perfect time to making saving a regular habit. Parents can start planning for their child’s future with a tax-advantaged college savings account.

Tax-Advantages of NC 529

The greatest benefit of education savings plans is that funds grow tax-free. That means NC 529 earnings are exempt from federal and North Carolina state income taxes, when the money is used to pay for qualified education expenses. Those expenses include tuition, books, room and board, expenses for K–12 tuition, and more.

If you’re just starting a college savings plan and want to make a larger contribution to take advantage of tax-free growth, one donor can contribute up to $15,000 a year to each NC 529 Account, without triggering the gift tax. Married couples can likewise contribute $30,000 annually.

Federal Tax Deduction

Financial experts agree that 529 savings plans are usually the best choice for families to save for college. While there are no federal tax deductions for contributions made to 529 accounts, families will enjoy the tax break when they make tax-free withdrawals to pay those college bills. An important benefit is that the sooner you start saving, the more years you have for the investment to grow.

State Tax Deduction

Just as there are no federal tax deductions for 529 Plans, North Carolina also does not offer in-state tax deductions for contributions to NC 529 Accounts. The incentive for 529 plans is that after-tax money grows free of federal and state taxes and will not be taxed when the money is taken out for education. This is more beneficial than other savings options, such as mutual funds, where the earnings are subject to annual income taxes and withdrawals are also taxed.

Other Benefits of NC 529

Fees are very low and vary depending on which investment option you choose. Investors can select from several investment options to match your investing strategies and risk tolerance:

  • Age-Based Options are based on the child’s age. As they get closer to heading off to college, investments gradually move from stocks to bonds and short-term reserves. Investors also can choose between aggressive, moderate, or conservative investment strategies.
  • Individual Options include nine different Vanguard portfolios and the Federally-Insured Deposit Account provided by State Employees’ Credit Union.

 

Discuss the options with a financial advisor to make the best choice for your family’s savings goals.

Another bonus; family members can contribute to your child’s account for birthdays and special occasions. There are no enrollment fees or sales charges to open an NC 529 Account when done through College Foundation, Inc., who administers it for the state. Start saving today with a minimum contribution of $25 and watch your child’s college dreams grow over the years.