Understanding 529 College Savings Accounts in North Carolina

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What is a 529 account?

Let’s start with the basics. 529 college plans are state-sponsored investment accounts opened in a parent or guardian’s name with his or her child listed as the beneficiary. Unlike mutual funds and many other traditional savings vehicles, earnings in a 529 account grow tax-free and are never subject to any taxes as long as the money is ultimately used for education-related expenses. The expenses covered aren’t limited to college tuition — room and board, textbooks and nontraditional postsecondary paths, such as enrollment at a technical school, are covered as well.

I have more than one child. Do I need multiple accounts?

Some people prefer the simplicity of having one account for multiple children; however, we don’t recommend this. There is no additional cost for having two or more 529 accounts, and the benefits are numerous. For example, you will likely want to invest differently for your 12-year-old than you do for your 5-year-old, since most people start out saving aggressively with younger children and shift to a more conservative investment approach as college nears.

Can 529 contributions hurt my need-based aid?

No, not more than any other savings account in a parent’s name. It’s important to understand the formula used by schools when calculating your Expected Family Contribution — how much you are expected to pay based on your family’s finances. Within the EFC formula, your assets are calculated at 5.65 percent while your child’s assets come in at a far heftier 20 percent. Any money in a 529 account will count as part of the 5.65 percent calculation, which is a huge advantage to you. 

What if my child ends up getting a full scholarship, or not going to college at all?

If you end up with a child who is brilliant in the classroom, on the basketball court or both, you may end up with zero tuition to pay and a big pot of money left over in your 529 account. You’ll find yourself in a similar situation if your child ends up not pursuing any form of postsecondary education at all. Fear not. The state won’t appropriate your account. The contributions you made were already taxed and this portion can be accessed without penalty. The earnings on that money will be taxed upon withdrawal but you would also have the option of shifting the money, penalty-free, to another child’s account. 

Do I also get state income tax deductions?

The particulars of each plan vary somewhat by state. In 34 states, there is a state income tax deduction for annual 529 contributions. However, sadly for our readers, North Carolina jettisoned this practice in 2014.

What’s good and bad about North Carolina’s plan?

Other than the inability to deduct on state income tax forms, there are only good things to report. North Carolina recently worked with Vanguard, an investment group that manages the state’s 529 accounts, to lower the already lower-than-average fees for local investors. While North Carolina offers a solid choice, residents are free to shop around for other 529 accounts, since most other states’ plans allow nonresident participation.

If you have a child and can scrounge up $25 (the North Carolina minimum), there is no good reason not to start a 529 plan today. It’s a safe and effective way to save money for the only expense in your life that is likely to rival your mortgage. The opportunity to grow money tax-free is unparalleled outside of certain retirement accounts and, for residents of some states, the additional state tax write-offs make this a winning endeavor.

Dave Bergman, Ed.D., is a co-founder of College Transitions, a team of college planning experts committed to guiding families through the college admissions process. He is also a co-author of “The Enlightened College Applicant: A New Approach to the Search and Admissions Process.” Learn more at collegetransitions.com.