Act Now to Save NC Taxes on Section 529 College Savings Plan Contributions and Rollovers

Tax breaks for the North Carolina Section 529 College Savings Plan are expiring 1/1/2012 for joint incomes over $100,000.  Currently, NC joint filers are eligible for a deduction of up to $5,000 from their state taxable income for contributions to the plan.  Single filers can deduct up to $2,500 in contributions.  These deduction levels are regardless of your income level for the 2010 and 2011 tax years.  For a couple in the 7% tax bracket, this would equate to $350 in savings on contributions of $5,000.

One interesting wrinkle is that rollover contributions from other state’s 529 plans are also eligible for the deduction.  If you currently have balances in another state’s plan, you should consider rolling them into the North Carolina plan.  Couples should contribute or rollover at least $5,000 for both 2010 and 2011 to obtain the maximum tax deduction each year.  Withdrawals from a 529 plan are income tax-free if used for qualified higher education expenses (college and beyond).

Most people that we see do not have sufficient education savings for their children.  How much you need to save depends on a variety of assumptions such as the current cost of education, the inflation rate of these costs and the rate of return on your education savings.  For a child born today and attending UNC Chapel Hill at age 18, you would need to save about $517 per month until they begin college.*

The cost of waiting to begin saving is significant.  For a ten-year old, you would need to save about $1,008 monthly under the same assumptions. 

Now is the time to get started or increase your education savings, while getting a little tax benefit.  All forms are available online at  The North Carolina plan uses Vanguard funds as investment options, and the cost is actually slightly lower than Vanguard’s own Nevada 529 plan (which I currently have for my children).  I intend to roll these balances over to the North Carolina plan.  If I can save $700 in state income tax over the next two years by pushing a few buttons, I will certainly do it.

*Assumes:  $18,000 current annual education cost (tuition, books, fees, room & board); 7% annual inflation on education costs; 8.6% annual total return on education investments.

Bill Hansen, CFA

October 8, 2010

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