Saving for College

While state income tax rates in North Carolina will drop to 5.8 percent across the board in 2014, the state has eliminated some tax deductions. Unfortunately, one change involves saving for college costs in the NC 529 plan. Parents in North Carolina no longer get a tax deduction for the 529 plan.  Tax advantaged college savings programs are extremely important to prevent heavy debt loads many students have when they graduate from college.

Besides the NC tax deduction that has been lost, there are advantages of using a 529 plan over simply saving money in a traditional account.  One major benefit is that the earnings generated by a 529 plan are not subject to federal tax when used for eligible college expenses.  While contributions to a 529 plan are not deductible, the account does grow tax-free for federal purposes as long as the funds are used for expenses associated with college or other qualified post-secondary training.  In addition, some states may offer other incentives to in-state participants.  529 plans are also flexible.  You can open up a 529 plan to benefit anyone: a relative, friend, or even yourself, and you are allowed to change the beneficiary of a 529 plan as long as the new beneficiary is in the same family.

There are things parents and grandparents can do to help with funding college.  Parents should fund IRAs because retirement savings usually don’t count against students for receiving college aid. Also, Roth IRA contributions (up to $5,000 annually for those under 50 and $6,500 for age 50 and over) can be withdrawn any time without taxes or penalties. Grandparents’ investments in 529-college savings programs do not count against financial aid until the money is withdrawn to pay expenses. Before any money is used, the control can be transferred to the parents, and only 5.6 % will typically be counted against the student’s college aid.

Just because you live in NC does not mean that you are limited to NC's plan.  Part of the attractiveness of NC's plan disappears now that the tax deduction has been eliminated. Two good web sites for comparing 529 plans are savingforcollege.com and collegesavings.org. The sites explain how you can shop among plans in different states; they also discuss the Coverdale ESA and compare its benefits to the 529 plan.

Finally, think about buying fewer toys and giving your children and grandchildren a gift that grows and prevents them from being burdened with crippling college debt.