Like many states, the NC529 Plan is a tax-advantaged, state-sponsored education savings plan. NC’s 529 offers investment options covering a range of risk strategies, from conservative to aggressive. A 529 Plan lets you choose how and when to invest the funds. You can be as hands-on or as hands-off as you choose to be with your investment approach.
529s help you family save for future college or graduate school expenses, like tuition, room and board, books and computers. A 529 plan can be opened with as little as $25. Individuals can contribute up to $14,000 per year or a $70,000 life time contribution can be made on the child’s behalf.
Remember, any type of investing comes with risk. Talk with the plan administrator or your financial advisor to help you find your comfort level. It can be opened through the College Foundation of North Carolina’s website at CFNC.org/NC529 or NC529.org.
Coverdell Education Savings Account (ESA)
The Coverdell ESA allows you to save money not only for future college expenses, but also for private elementary or high school education. You can open a Coverdell with any financial institution, including your Credit Union. A Coverdell is not an investment account, but instead earns dividends just like your share (savings) account.
Parents and grandparents, or even extended family and friend can open a Coverdell ESA in the name of a child. The Coverdell allows you to contribute up to $2000 annually in 2017. The accounts come with annual income maximums. Check with you financial advisor on contribution limits for single and joint tax filers.
Families focused only on saving for college may prefer the 529 Plan since it offers tax benefits not available with a Coverdell ESA. With the 529, earnings generally grow tax free from federal and state income taxed when used for qualified expenses. The benefit is the tax free withdrawal of earnings built up in the plan over the years. So, if you get started early with contributions you may have built up significant earnings when it’s time to withdraw the funds. Contributions, however, are not tax-deductible.
With a Coverdell, earnings generally grow tax free if the money is used for the child’s education expenses before the child turns 30. The one exception is if the child has special needs. Then, the account can continue to be funded and the money can stay in the account after age 30.
If you need to withdraw funds early from either of the accounts, you can, but you could be subject to tax penalties. Your tax advisor can help explain tax implications.