How to Use 529 Funds Correctly and Avoid Penalties

An NC 529 Account is a great way to save for education. The popularity of 529s has risen in the last several decades after the federal government created the accounts in 1996. One of the main reasons more people are utilizing 529 accounts is because the funds can grow tax-free — meaning you won’t pay taxes on earnings or withdrawals as long as you use the funds for education and now retirement (more on that later!).

NC 529 Accounts can be used for many types of education needs, which may have you asking, “Exactly what can 529 funds be used for?”

Common Qualified Education Expenses

An easy way to understand how to use 529 funds is to consider qualified and non-qualified education expenses. Essentially, any qualified expense is something needed for school and education, while non-qualified expenses wouldn’t be necessary to complete a degree or certificate.

When most people think about educational expenses, they think of college tuition — but that’s far from the only way you can use your NC 529 funds. Here are some additional examples of eligible education expenses: 

• Student fees (included in the college cost of attendance) 
• Textbooks
• A new laptop for college classes
• Assistive learning technology or equipment for students with disabilities
• On-campus dorm and meal plan
• Off-campus apartment and groceries

Note that room and board for off-campus apartments can include monthly rent, utility bills, and groceries as long as the amount spent on these items is not more than the amount calculated for room and board by the institution. This is an allowance included in the cost of attendance, and the student must be enrolled at least half-time for these expenses to be qualified.

Non-Qualified Expenses

What is a non-qualified expense? Generally, it’s anything that doesn’t explicitly serve an educational purpose. Stay clear on which expenses are non-qualified to save your wallet from penalties and fees when you make a withdrawal from your NC 529 Account.

Here are a few examples of non-qualified expenses that may be mistaken for qualified: 

• Greek life expenses, such as dues or events
• Transportation for trips home, such as plane or train tickets

Computers and other technology not used for education, such as gaming systems and TVs

What happens if you do use NC 529 funds for a non-qualified expense? This is your money, and we understand that life events come up that may necessitate a non-qualified withdrawal. Here’s what to expect: 

• A 10% federal penalty on the withdrawal
• State and federal income taxes on the earnings
• A $50 processing fee for each non-qualified withdrawal

Where To Spend Your NC 529 Funds

Most families use NC 529 Accounts to save for college expenses at two-year and four-year schools, K–12 tuition, and career/technical programs. That may seem like a pretty broad definition of where to spend your funds, but that’s the way 529s are designed. They’re flexible and can be used for many different types of schooling (including things like flight school for pilots and training programs for air mechanics). There are several resources to find eligible apprenticeship programs:

• Federal Student Code List
• U.S. Department of Labor
• North Carolina Department of Commerce for Apprenticeships

If your child plans to attend college, the CFNC College Search makes it simple to research public, private, and community colleges in North Carolina where NC 529 funds can be used tax-free.

Making a Withdrawal

Once you’re ready to make a withdrawal from your child’s NC 529 Account, the fastest way to access funds is to request a withdrawal from your account online. Simply sign in to your account, select the account you want to make a withdrawal from and follow the steps. You can also download a withdrawal form and email, fax, or mail it to the NC 529 Plan. Funds are either sent directly to you or the beneficiary’s school.

Keep in mind that NC 529 funds withdrawals must be made in the same tax year in which qualifying expenses are paid. That means you should keep itemized receipts for each purchase made. Also, NC 529 rules require you to take out at least $250 for a qualified withdrawal, and a separate form is required for each withdrawal.

If you have any questions about how to use 529 funds, you can review the Program Description, check out our FAQ section, or contact an NC 529 representative.

How To Use Leftover 529 Funds

So, you’ve saved up for education, but maybe you don’t need to use all the funds you saved. There are several ways to use leftover funds without paying taxes or penalties. 

1. Add a new beneficiary: You can simply keep the remaining funds in the NC 529 Account and change the beneficiary to someone else. This can be a parent, sibling, or other family member. As long as the funds are used for qualified education expenses, there are no penalties for switching beneficiaries.
2. Roll it into a Roth IRA: Saving for your child’s education with the NC 529 Plan has more advantages than ever. Starting in 2024, unused funds can be rolled over into a Roth IRA for the beneficiary. There are restrictions, so be sure to consult your financial advisor or CPA to ensure you’re handling the rollover correctly.
3. Withdraw scholarship amounts: If the account beneficiary gets a scholarship, you can withdraw the same amount from your NC 529 Account tax-free. It takes hard work to earn scholarships, and hard work should be rewarded!

Make the Most of Your Savings

Saving with the NC 529 Plan can be a wise investment, and can significantly increase your education savings, especially when you know how to use NC 529 funds to maximize your tax benefits and avoid penalties. No matter what your beneficiary’s educational goals are, there are many ways to use NC 529 funds without paying taxes, and the earlier you start saving, the bigger your investment can grow over time.

It only takes $25 and a few minutes to get started, so open an NC 529 Account and start planning for the future today.