If you haven’t started saving for college yet, there is no time like the present! In recent years, college costs have risen an average of five percent annually. If that pace keeps up, the average cost for one year at a public four-year in-state school could jump from $22,000 to more than $55,000 per year in 18 years. To help families save for college, most states, including North Carolina, have 529 college savings programs.
North Carolina’s National College Savings Program is more commonly referred to as the “NC 529 Plan.” It’s open to residents of any state, and the money can be used at any eligible school, anywhere in the country. The really good news is that NC 529 Account earnings grow tax-free! That means they are exempt from federal and, for N.C. taxpayers, state income taxes, when used for qualified education expenses which include:
NC 529 funds also can be used to pay tuition for children in kindergarten through 12th grade.
Anyone can open and contribute to an NC 529 Plan, including parents, grandparents, other relatives, and even family friends. The child is named as the beneficiary, and the adult is the account owner. There are no fees to open the account, and you can start saving with as little as $25. Enrolling takes just a few minutes.
It’s also easy to make saving a habit by setting up regular contributions on a monthly or annual basis. To make saving easy, you can set up regular deductions from your checking account or even through your employer as a payroll deduction. Another way to grow the account is to ask family and friends to make contributions to the NC 529 Plan for birthdays and holidays, instead of buying gifts. Any amount saved now will grow for the future.
This part won’t get too complicated. In fact, we have just two words for you — compound interest. Basically, the longer your money can grow tax-free in the NC 529 Account, the more it will increase. That’s because all the interest is reinvested, so you’re earning interest on your interest.
For example, if the parents of a one-year-old save $100 a month with an annual average rate of return of five percent, they could have more than $37,000 by the time their child starts college. However, if the same parents open their account with $5,000 and continue to save $100 a month at the same rate, they could save more than $49,000 in the same time period. Thank you compound interest!
Every college savings plan has different investment options. The NC 529 Plan has a range of investment strategies, from conservative to aggressive. The plan also has suggestions for investments, depending on your child’s age and your investment objectives.
If your child decides college is not right for them, don’t worry, there are still options for your NC 529 Plan. You can also change the beneficiary on the account to a sibling, another child, or even yourself.
There is no time limit to use the funds. Your child may not want to attend college right after high school but could change their mind five years down the road. The NC 529 Plan will still be there, earning interest and growing.
However, if you decide to use the funds for something other than qualified education expenses, you will have to pay income taxes, plus a 10 percent federal penalty on the earnings.
Even if your child is still in high school, it’s never too late to take advantage of the valuable tax benefits of a 529 Plan. Even a few years of tax-free growth in the account can put your child one step closer to attending the college they want, rather than the one they can afford.