If you are planning to fund your child’s or another family member’s college education and live in North Carolina, you should know about the North Carolina 529 college savings plan. Investments in this account grow without paying federal and state income taxes, and all withdrawals used for qualified higher education expenses are exempt from federal and state income taxes. However, contributions made to the plan cannot be deducted from your income for state tax purposes.
Investing in the Plan
The North Carolina 529 plan allows state plan participants to choose from several investment options:
- A guaranteed deposit account by the State Employees’ Credit Union
- Age-based investment options provided by Vanguard
- Individual investment options provided by Vanguard
Contributions to the account and the interest earned in it are guaranteed by the National Credit Union Administration and insured by the National Credit Union Administration.
The last two options consist of index funds and other funds managed by the Vanguard Group. There are three age-based options that automatically allocate investments between stock funds, bond funds, and short-term reserves as the beneficiary’s birthday approaches or as the child grows up. Generally, the younger the beneficiary, the higher the percentage of stocks in the investment mix, and the lower the stock percentage at lower risk levels. The three age-based options end with most or all of the money being invested in bonds or short-term reserves.
Individual investment options are not rebalanced according to the beneficiary’s age. There are nine portfolio options to choose from, five of which consist of multi-fund options. The five multi-fund portfolios vary in terms of risk, from aggressive growth to a focus on income generation. The four single-fund portfolios aim to match the return of a stock or bond index or the accumulation of interest.
Fees and Expenses
The deposited account is subject to an annual management fee of 0.25% of the amount invested. Vanguard options are subject to annual management fees and investment expenses ranging from 0.30% to 0.32% of the amount invested. Returns are not guaranteed, and investments made in Vanguard plans can incur losses.
529 Plan vs. Other Savings Accounts
North Carolina residents should also explore whether it would be beneficial to invest in another type of account to cover college expenses, such as a Coverdell Education Savings Account, a custodial account for minors, or a gifted deposit account for minors. A financial advisor or similar professional should be consulted about which plan is likely to give you the greatest benefit.
Gift Tax Exemption
North Carolina residents can contribute $75,000 in a single year ($150,000 for married couples filing jointly) per beneficiary without incurring federal gift tax. However, the donor or donors cannot make any additional gifts to the beneficiary for five years. Alternatively, an individual donor can give $15,000 each year, and married couples can contribute up to $30,000 without incurring gift tax.
Non-Qualified Withdrawals
Any withdrawals from the plan used for purposes other than qualified education expenses are subject to federal and state income taxes as well as a 10% federal income tax penalty.
Source: https://www.thebalancemoney.com/north-carolina-college-savings-plan-795333
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