NC 529 Plan Withdrawal Rules: Understanding Non-Qualified Withdrawals
It’s no secret that utilizing the NC 529 Plan is a great way to begin saving for education and preparing for the future. Many parents, and even students, choose to save with the NC 529 Plan because the earnings can grow tax-free when the funds are used for qualified education expenses including K–12 tuition, college, career/technical programs, and more.
But what happens if you take money out of an NC 529 Account for a non-qualified expense? There are some NC 529 Plan withdrawal rules that you should be aware of before you start spending your funds. First, let’s take a closer look at the different types of expenses.
Qualified and Non-Qualified Education Expenses
To maximize the tax benefits of your NC 529 Account, it’s important to know the difference between non-qualified and qualified education expenses. Here are a few examples of each:
- Qualified 529 Expenses:
- Textbooks
- Room and board on campus or an off-campus apartment
- Meal plans or groceries
- Tuition
- Student loan payments
- Roth IRA rollover
- Non-Qualified Expenses:
- Tickets to school sporting events
- Car payment
- Cell phone bill
- Travel to and from school
Since the whole purpose of an NC 529 Account is to help families save for K–12 and college, we encourage you to avoid using these funds for anything unrelated to your child’s educational journey. Sticking to only making qualified withdrawals will be the best way to grow your money and avoid any unnecessary taxes and fees.
NC 529 Plan Withdrawals Not for Education
You may be wondering, “What happens if you take money out of a 529 for a non-qualified expense?” Unexpected emergencies are part of life, and we aren’t always financially prepared to manage them. Even though these are emergencies, they are not considered a qualified education expense. So, if you find yourself in a situation where you need to take funds out of the account, you’ll want to understand the NC 529 plan withdrawal rules for a non-qualified expense.
Once the NC 529 Account has been open for at least 60 days, an account holder can withdraw funds at any time. The quickest way to make a withdrawal will be to use our website. Simply sign in to your account and follow the steps for a non-qualified withdrawal. You can also download and complete a Request for Withdrawal and email, mail, or fax it to the NC 529 Plan. You’ll also be responsible for taxes and penalties for the non-qualified withdrawal.
Penalties for Non-Qualified Withdrawals
Making a non-qualified withdrawal is where account holders are sometimes surprised and caught off guard. If you choose to make a non-qualified withdrawal, there will be taxes and penalties. Any withdrawals where funds are spent on non-educational expenses will be subject to:
- Federal income taxes on the earnings
- North Carolina state income taxes on the earnings
- 10% withdrawal penalty on the earnings
- $50 transaction fee
Withdrawing funds for non-educational expenses can have a big effect on the amount you have saved. Before making a non-qualified withdrawal, consider other options you may have, including temporarily adjusting any automatic contributions you have scheduled or tapping funds from a different source until you get back on your feet.
NC 529 Plan Withdrawal Rules for Qualified Expenses
When you make a qualified withdrawal to pay a college tuition bill, make a student loan payment or other education expense, the rule is you will not be subject to any taxes, fees, or penalties. We love that rule because it helps you maximize the benefits of your NC 529 Account!
A qualified withdrawal can also be made on our website or by submitting a form. You can also have the funds sent directly to your child’s school or to yourself.
Now that you know more about the NC 529 plan withdrawal rules, we hope you’re ready to start saving for the future. If you haven’t done so already, open an NC 529 account today.