CHET and 529 Plans in Connecticut and North Carolina: The Tax Rules

What a 529 plan is

The IRS defines a qualified tuition program as a program set up by a state (or a state agency) that lets you either prepay a beneficiary's education costs or contribute to an account to pay them. Colleges can also set up prepaid plans. Under federal law:

• Contributions aren't deductible on your federal return.
• Earnings aren't taxed while in the account.
• Withdrawals aren't taxed when used for qualified education expenses.
• Each program sets its own contribution limit. The IRS says to check with the program's administrator.

This page explains the tax rules only. It doesn't compare plans or investment options.

The Connecticut CHET deduction

Connecticut lets you subtract CHET contributions from federal adjusted gross income on Form CT-1040 (Schedule 1, the CHET contributions line). The rules, from the CT-1040 instructions and CT DRS:

• Overall limit, not per child. The $5,000 or $10,000 covers contributions to all CHET accounts combined, no matter how many beneficiaries.
• Five-year carryforward. Contributions over the limit carry forward for the next five tax years. Each later year is still capped at $5,000 or $10,000, and that year's own contributions are used first.
• Anything not used in five years is lost. CT DRS's example: a head of household who contributes $38,000 in one year can deduct $5,000 that year and $5,000 in each of the next five. The last $8,000 is never deductible.
• Any CT filer can claim it, not only the account owner. A grandparent who files a Connecticut return can deduct contributions to a grandchild's CHET account. The beneficiary doesn't need to live in Connecticut.
• Calendar-year timing. Contributions count for the tax year they're made in. For a calendar-year filer, that means by December 31.
• Rollovers don't count. Moving money into CHET from another state's 529 or a Coverdell account isn't a deductible contribution.
• Can't take you below zero. The deduction can't reduce your Connecticut AGI below zero. Any unused part carries forward.
• Withdrawals don't reduce it. Distributions in the same year aren't netted against contributions.

You can also send all or part of a Connecticut refund into a CHET account using Schedule CT-CHET.

Figure your CHET deduction and carryforward

North Carolina: no state deduction

North Carolina allowed a deduction for contributions to its 529 plan from 2006 until it was repealed for tax years starting on or after January 1, 2014. There's no NC deduction now, for NC's plan or any other state's.

One leftover rule: if you took the old NC deduction and later withdraw money for a purpose that isn't allowed under section 529, NCDOR's D-401 instructions require you to add back the amount you deducted.

What counts as a qualified expense

• College and career school: costs required for enrollment or attendance at a college, university, vocational school or other school eligible for federal student aid. Room and board can qualify for a 529 (see IRS Publication 970 for the limits).
• K-12: up to $20,000 a year per beneficiary from all 529s combined ($10,000 before 2026). That covers tuition at public, private or religious schools, curriculum and books, outside tutoring, standardized and AP tests, dual enrollment fees and educational therapies for students with disabilities.
• Apprenticeships: fees, books, supplies and equipment for a program registered with the Secretary of Labor.
• Student loans: principal or interest for the beneficiary or a sibling, up to $10,000 lifetime per person. Interest paid this way can't also be taken as the student loan interest deduction.
• Credentials: certain qualified postsecondary credentialing expenses.

K-12 and some newer uses are federal rules. State treatment can differ, so check the state's rules before relying on them.

Withdrawals that aren't for qualified expenses

If a withdrawal is more than the beneficiary's qualified expenses, part of the earnings is taxable income, and IRS Publication 970 says a 10% additional tax generally applies to that taxable amount. The contributions themselves come back tax-free. Exceptions to the 10% include the beneficiary's death or disability, and amounts matching a tax-free scholarship. Each withdrawal is reported to you on Form 1099-Q, split between earnings and your contributions (basis).

Rolling a 529 into a Roth IRA

Since 2024 the beneficiary can move 529 money to their own Roth IRA, tax-free, if all of these are met (IRS Tax Topic 313):

• A direct trustee-to-trustee transfer.
• The 529 account has been open at least 15 years.
• Contributions (and their earnings) from the last 5 years can't be moved.
• Each year's transfer counts against the beneficiary's Roth IRA contribution limit for that year.
• A $35,000 lifetime limit per beneficiary.

529 withdrawals and education credits

You can take a tax-free 529 withdrawal and claim the American Opportunity or Lifetime Learning credit in the same year, but not for the same expenses. Read Education tax credits: AOTC and LLC for how the two fit together.

Other Connecticut programs for kids

• CHET Baby Scholars is a CHET program for babies with its own rules. See CHET for the current details.
• CT Baby Bonds (CT Office of the Treasurer): $3,200 is set aside automatically for each Connecticut baby born on or after July 1, 2023 whose birth was covered by HUSKY Health. There's nothing to apply for. Between ages 18 and 30, the child can claim the money for uses including higher education or job training, a Connecticut home, a Connecticut business or retirement savings.

How 529s show up on the FAFSA

A parent-owned 529 is reported as a parent asset. 529s owned by grandparents or others aren't asked about on the FAFSA. Details: the 2027-28 FAFSA guide.