Who Can Contribute to a 529 Plan?

A grandfather speaking to his grandson about the importance of money.

A 529 plan is one of the smartest investments that can be made for someone’s future. Even so, there are some uncertainties if you’re unfamiliar with how 529 plans work. Who can contribute to a 529 plan? Is it open to anyone? How can you contribute to it? Are there limits to contributions? What about tax advantages? We’re here to set the record straight.

Who Can Contribute?

There is no real limit as to who can contribute to a 529 plan. Immediate family, extended family, or even people to whom you aren’t actually related can all contribute to a plan to help prepare for the expenses associated with a college education. In fact, a 529 contribution makes a great gift! You can encourage people to contribute to 529 accounts for birthdays, baby showers, holidays, graduations, and more. There are even gift certificates available for 529 plans.

How Do You Contribute to a 529 Plan?

There are all kinds of ways to contribute to a 529 plan, including recurring bank draft, check, funds transfer, or payroll deduction. You can also “roll over” another 529 account into an NC 529 Plan.

One-time contributions are also an option if an individual cannot contribute on a regular basis. It’s worth noting that while there is not an annual fee for an NC 529 Plan, it is important to keep a balance above the minimum of $25 in the account, and to keep adding to it.

Are There Any Limits to 529 Plan Contributions?

Yes. There are limits on how much you can contribute to a 529 plan. These limits are established by the Internal Revenue Code in order to prevent any beneficiary of a 529 account from exceeding the amount needed to fund their qualifying expenses. Currently, the maximum amount allowed for a single beneficiary of an NC 529 program is $450,000. This number refers to the beneficiary, rather than each individual 529 plan.

This number is based on seven total years of postsecondary education (four years of undergraduate studies, and three years in a master’s or professional program) of education at the most expensive schools in North Carolina. It’s also important to point out that the NC 529 plan can also be used at out-of-state schools.

For a contributor, there are limits related to the federal gift tax. Individuals may contribute up to $15,000 annually (or $75,000 prorated over five years) to avoid the federal gift tax. This amount is doubled for married couples electing to “split” gifts.

Is a 529 Plan Taxable?

If the 529 plan is utilized by a beneficiary for its intended purpose of education-related expenses, including, but not limited to, tuition, room, board, and books, earnings on an NC 529 Account are free from federal and, for North Carolina residents, N.C. income taxes.

If the funds in a 529 plan are withdrawn for purposes that do not relate to education, they are subject to a 10 percent penalty, as well as state and federal income taxes. This is called non-qualified withdrawal.

As of 2013, contributions to an NC 529 Plan are no longer tax-deductible, as a result of legislation passed by the North Carolina general assembly.

What Happens if You Don’t Use All of Your 529 Plan Funds?

For one reason or another, a beneficiary might not use all of the funds in their 529 account. In the event of this happening, there are several options.

The participant, or person who established the 529 account can “roll over” the 529 account to a new beneficiary. The new beneficiary must be a member of the original beneficiary’s family, so perhaps a sibling or parent who wishes to return to school. The funds can also remain in the original beneficiary’s account to be used later for a graduate or professional program. Lastly, the funds can be withdrawn for non-education related reasons as a non-qualified withdrawal. Remember that will you be taxed on the earnings if you take this option.

If the beneficiary receives a scholarship paying for a portion of the expenses that would normally be covered under a 529 plan, the participant and beneficiary will not lose access to their NC 529 Plan money. The amount of the scholarship can be withdrawn but will be subject to state and federal income taxes.

Hopefully, this explanation has cleared any confusion you may have about who can contribute to an NC 529 Plan. Now, you should understand that everyone and anyone can contribute! So, what are you waiting for? Create your account and start saving today!