NC 529 Plan Rules: Contributions, Taxes & Withdrawals

A 529 plan is a savings account designed to help families set aside funds for future education costs. Authorized under Section 529 of the Internal Revenue Code, these plans offer tax advantages to encourage saving. North Carolina offers the NC 529 Plan, which allows individuals to invest money that can grow and later be withdrawn tax-free for a wide range of educational pursuits.

The plan is administered by College Foundation, Inc., and is available to residents of any state. Its structure is governed by specific rules that are important for account holders to understand. The plan is also flexible, allowing funds to be used at eligible institutions across the country, not just within North Carolina.

NC 529 Plan Eligibility and Contribution Rules

To open an NC 529 account, the account owner must be at least 18 years old and have a valid Social Security Number or other taxpayer identification number. There are no income limitations for the person opening the account. The designated beneficiary, who is the future student, can be of any age, and the account owner can also name themselves as the beneficiary. This structure allows parents, grandparents, or friends to establish an account for a child’s future.

Contributions to an NC 529 account are made with after-tax dollars, as they are not federally tax-deductible. While anyone can contribute to an existing NC 529 account, there are limits on how much can be given in a single year without incurring federal gift tax. For 2025, an individual can contribute up to $19,000 per beneficiary without gift-tax consequences.

A special rule allows for “superfunding,” where an individual can make a lump-sum contribution of up to $95,000. This amount represents five years of gifts and can be made in a single year without triggering the gift tax. The plan also sets a minimum contribution amount of $25 for both the initial deposit and any subsequent payments.

The NC 529 Plan has a maximum account balance limit of $550,000 per beneficiary. Once this limit is reached, no further contributions can be made to the account. However, the existing funds can continue to accrue earnings through investment growth.

Tax Benefits of the North Carolina 529 Plan

The tax advantages of the NC 529 Plan are primarily realized at the federal level. North Carolina does not offer a state income tax deduction for contributions, so individuals should not expect to lower their state taxable income in the year they make a deposit.

The first major benefit is that investments within the account grow on a tax-deferred basis. As the account’s value increases through investment returns, no federal or state income taxes are due on those earnings year after year. This allows the account balance to compound more rapidly than it would in a standard taxable brokerage account, where annual dividends and capital gains would be taxed.

The second benefit occurs when the funds are eventually withdrawn. Withdrawals are completely tax-free at both the federal and North Carolina state levels, provided they are used for Qualified Education Expenses (QEE). This tax-free withdrawal of earnings is the core benefit of using a 529 plan, as no portion of the account’s growth is lost to income taxes when used as intended.

Rules for Withdrawing and Using NC 529 Funds

The tax-free status of withdrawals is contingent upon the funds being used for specific, approved costs known as Qualified Higher Education Expenses (QHEE). These traditionally include tuition and mandatory fees, books, supplies, and equipment required for enrollment or attendance at an eligible postsecondary institution. Room and board costs also qualify, as long as the student is enrolled at least half-time.

The definition of an eligible institution is broad, covering most accredited colleges, universities, and vocational schools nationwide that are eligible to participate in federal student aid programs.

In recent years, the definition of qualified expenses has expanded, offering more flexibility. Account funds can now be used for:

• Up to $10,000 per year, per beneficiary, for tuition at an eligible elementary or secondary public, private, or religious school.
• Expenses for fees, books, supplies, and equipment for certain apprenticeship programs registered with the U.S. Department of Labor.
• A lifetime maximum of $10,000 to be used for payments of principal or interest on a qualified student loan for the beneficiary or their sibling.

Taking a withdrawal for any purpose other than a QEE is known as a non-qualified withdrawal and has tax consequences. While the portion of the withdrawal that represents your original contributions is returned tax-free, the earnings portion is not. The earnings are subject to both federal and state ordinary income taxes, plus an additional 10% federal tax penalty.

For example, if you withdraw $10,000, and $2,000 of that is earnings, that $2,000 will be taxed as income and assessed the 10% penalty. This results in a $200 federal penalty on top of the income tax liability. The NC 529 Plan also charges a $50 processing fee for such a withdrawal.

Managing Your NC 529 Account Over Time

Account owners have flexibility in managing the NC 529 account as circumstances change. One feature is the ability to change the beneficiary. If the original beneficiary decides not to pursue higher education, receives a full scholarship, or has leftover funds, the account owner can change the beneficiary to another eligible member of the family without incurring any tax penalty. An eligible family member is broadly defined and includes the beneficiary’s spouse, children, siblings, parents, nieces, and nephews, among others.

Funds can also be moved between 529 plans through a rollover. An account owner can perform a tax-free rollover from another state’s 529 plan into the NC 529 Plan, or from the NC 529 Plan to another state’s plan, once within a 12-month period. This allows families to consolidate accounts or seek different investment options if their needs change.

A tax-free rollover from a 529 account to a Roth IRA for the beneficiary is permitted under specific conditions. The 529 account must have been open for at least 15 years, and any contributions or earnings from the last five years are not eligible for the rollover. The rollover is subject to the beneficiary’s annual Roth IRA contribution limit and has a lifetime maximum of $35,000.

Within the NC 529 Plan, account owners have control over how their contributions are invested. The plan offers a variety of investment portfolios with different strategies and levels of risk. To prevent active trading within the tax-advantaged account, federal rules limit how often an owner can change the investment options for their existing account balance. These changes are restricted to twice per calendar year or when the account beneficiary is changed.