How to Spend From a 529 Account - Without Paying Taxes

Wednesday, March 1, 2023

After years of saving for your child's education in an NC 529 Account and choosing the investment options that best fit your budget and goals, you're excited to see your hard work pay off. So, before that first college or K-12 tuition bill arrives, here's how to use your NC 529 funds to maximize your tax benefits.

The Key is to Use the Money for Education Expenses

You set aside money to invest in your student's education. You encouraged friends and family to make contributions on birthdays and holidays. Now, it's time to withdraw the funds, but you're worried that you might do it wrong and end up paying taxes. The simple answer is to use your NC 529 funds for qualified educational expenses.

Understanding what qualifies as an educational expense is the next order of business. Good news for you, there are a lot! Keep reading to learn all of the ways you can use your NC 529 funds to maximize your tax-advantaged account.

Qualified Education Expenses

Your NC 529 Plan is designed to make education more affordable by providing a tax benefit on your investments when they are used for qualified education expenses. Here's a detailed list of qualified NC 529 expenses:

  • Post-Secondary Education Expenses (not just college!): Eligible higher educational institutions include any 2-year or 4-year college, community college, trade school, graduate or professional school, as long as they are on the Federal Student Aid list.
  • Room and board: Living away from home during college can get quite expensive for parents paying out of pocket. Thankfully, NC 529 funds cover room and board to save parents on education costs. If the beneficiary chooses to move to an off-campus apartment, NC 529 funds will still cover rent, utilities, and food."Off-campus living expenses are considered qualified education expenses, as long as the expenses don't exceed what it would cost to live in on-campus housing," said Laura Morgan, Vice President of Communications, Savings, and Legal Affairs at College Foundation, Inc. (CFI).
  • K-12 education: The great thing about NC 529 Accounts is that parents can also use funds before their little one graduates from high school. If you're interested in sending your child to private elementary, middle, or high school, funds from your NC 529 Account can pay up to $10,000 per child per year.
  • Study abroad: A semester abroad can expand your student's horizons and expose them to other cultures."If the international institution is eligible for Title IV federal student aid, you can use a tax-free withdrawal from your student's NC 529 Account to pay for study abroad tuition and fees," said Morgan.
  • Apprenticeships: If your student is more interested in starting their career sooner and working in an apprenticeship program, those program expenses can be covered by NC 529 funds as long as the program is listed with the U.S. Dept. of Labor or State Apprenticeship Agency.
  • Technology and books: Computers and academic-related technology expenses qualify as educational expenses with an NC 529 Account. Similarly, funds for books and other reading materials can also be withdrawn tax-free.
  • Student loans: The account beneficiary and the beneficiary's siblings can use up to $10,000 each from the NC 529 Account to help repay student loans.
  • Roth IRA rollover: Beginning in 2024, excess NC 529 funds can be rolled over to the beneficiary's retirement account without paying additional taxes.

What the NC 529 Plan Does Not Cover

Nonqualified expenses are not covered by the NC 529 Plan. If you use your NC 529 funds for a nonqualified expense, then the earnings on your withdrawal are subject to state and federal taxes, as well as a 10% penalty. Here's an example of nonqualified expenses:

  • Health insurance
  • ACT/SATs
  • Application fees
  • Clothing
  • Furniture
  • Personal expenses for the account holder

Don't Worry if You Have Funds Left Over

If the original NC 529 beneficiary graduates or no longer needs the account, there are other ways to make the NC 529 Account work for your family without losing the tax benefits. You can change the beneficiary to a younger sibling who's entering school or make yourself the beneficiary to further your own education. Or, starting in 2024, funds left in accounts can be rolled to a Roth IRA for the beneficiary, giving your student a head start on retirement savings!

The NC 529 Plan is here to help families save money for education costs. Understanding how to spend the account on qualified expenses will help you avoid paying taxes and stretch your education dollars.