Comparing the Pros and Cons of a 529 Plan

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The future is uncertain! That’s the only thing we know for sure. But when it comes to our children, we want to provide the best future possible. For many parents, that means making sure they can afford to give their children the education they want and need. 

Opening an NC 529 Account for your child is one way to fund their education, but is it the right choice for your family? Discover the pros and cons of a 529 plan to decide if this type of education savings account is right for your family.

Benefits of a 529 Plan

North Carolina’s National College Savings Program, or the NC 529 Plan, is a state-run program established to help students save and invest funds to pay for educational expenses. You don’t have to be a resident of North Carolina to use an NC 529 Account, and North Carolina residents can use a 529 plan operated by another state. Every 529 plan is unique, but they all are meant to help students obtain an education. Here are the benefits:

Tax Advantages

Quite possibly, the biggest benefit of saving in a 529 program is the tax-free growth. The money you invest may grow over time, and any earnings are free from federal and state income tax when they are withdrawn and used for Qualified Education Expenses (QEE). Those include college expenses, K–12 tuition, apprenticeship programs, student loan payments, and more!

Variety of Investment Options

You can design and manage your own investment strategy with individual portfolios or take more of a hands-off approach. The NC 529 Plan’s age-based options, for example, are professionally assembled, and your money is automatically moved from one investment to another based on your child’s age.

Easy to Contribute

The 529 plans have no annual contribution limits and high aggregate limits, which vary by state. You can contribute on a regular basis or make occasional contributions, whichever you prefer. Anyone can contribute to an NC 529 account, like a loving relative who wants to offer a priceless gift.

One easy way to contribute is to set up automatic withdrawals from your paycheck. NC 529 Account holders can also enroll in the employee payroll deduction program if their employers participate. Many 529 plans offer a similar option.

Still Qualify for Financial Aid

Don’t let the idea of not qualifying for financial aid discourage you from saving for college. If a parent holds an NC 529 Account and the student is the beneficiary, the funds are listed as a parental asset on the Free Application for Federal Student Aid (FAFSA) and generally have minimal impact on financial aid.

Additionally, if a student earns a scholarship, funds equal to the amount of the scholarship can be withdrawn from an NC 529 Account without penalty. The earnings portion of the withdrawals will still be subject to taxes.

Encourage Education

A recent study found that “students with savings accounts were three to four times more likely to graduate from college than those without.” So, just knowing there’s a savings account specifically designed for your child’s education may encourage them to go to college or continue their studies beyond a high school diploma. Making a family agreement that the money in an NC 529 Account will only be used for education is another way to set the expectation that higher education is a priority.

Disadvantages of a 529 Plan

While the inability to use funds from a 529 account for anything other than education is often seen as a benefit, it can be considered a disadvantage. Here are some disadvantages to see if it is best for your family to explore other savings options.

Money Can Only Be Used for Education

If you would rather your child use savings for anything besides education, you can consider an alternative to a 529 account. You can save using a Roth IRA, but only contributions, not earnings, can be withdrawn without tax penalties prior to age 59½. There is also a Uniform Gift to Minors Account (UGMA), which is a custodial account that allows parents to transfer assets to minor children. Once the child turns 18, the account belongs to them, and they can use the funds however they want.

Tax Penalties for Early Withdrawal

If you want to withdraw money from a 529 account for non-educational purposes, you will need to pay a penalty. Internal Revenue Service rules deem that a participant making a “non-qualified withdrawal” from a 529 account must pay federal and state income tax on the earnings portion of the withdrawal plus a 10% penalty.

Make the Right Choice

For many families, the benefits of having an NC 529 Account outweigh the disadvantages. And on top of that, what is listed as a disadvantage may, in turn, be seen as a benefit (the money can only be used for education — which encourages education)!

Consider opening an NC 529 Account today and set your student on the path toward success.

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