The Facts About Bright Directions and Other Illinois 529 Plans
Illinois Has Some of the Highest Possible Tax Deductions in the Country
In Illinois, families can save for college expenses with 529 savings plans such as Bright Directions. Fortunately, these plans aren't exclusively reserved for first-degree relatives like parents. Extended family, loved ones and even friends can contribute to a child's 529, making it more affordable for the young person to pursue higher education. As an incentive to begin saving, 529 savings plans have significant tax benefits.
Illinois has three specific 529 savings plans within the state. They are as follows:
- Bright Start College Savings (Direct-Sold): This plan is offered directly by the state and blends age-based options with static options too. Age-based options begin with aggressive investment strategies but grow more conservative as the beneficiary gets closer to graduating from high school. The plan has low annual fees, making it a strong way to maximize your investments.
- Bright Start College Savings (Advisor-Sold): Offered by advisors, this plan has higher fees than the Bright Start College Savings Program but has more options. It has a broad portfolio with a mix of stocks, bonds, fixed income and money market funds.
- Bright Directions College Savings: This plan is sold only by advisors. It has several age-based options and over 50 static options for investors. This plan has higher annual fees but has also shown higher than average annual returns on investments.
Why Should I Open a 529 Savings Plan?
Beyond saving for college, contributing to a 529 savings plan has tax benefits for contributors. In Illinois, contributors can deduct up to $10,000 for single filers and up to $20,000 for joint followers; this is one of the highest deduction limits in the country.
Any earnings on the plan are not subject to income tax, so as the investments grow, a 529 savings plan can be a powerful tool to pay for higher education.
How Do I Contribute?
Any U.S. citizen or legal resident over the age of 18 can contribute to a 529 savings plan. All three of Illinois' plans has a minimum contribution of just $25 a month. If you opt for a payroll deduction, you can contribute as little as $15 a month.
The maximum amount you can put into a 529 savings plan in Illinois is $350,000.
When Do I Need to Use the Savings Plan?
The money in the Illinois savings plans does not need to be used within a certain amount of years after graduation or by a specific age. It offers flexibility for students who opt to take breaks after high school or who start working and go back to school later in life.
If your child takes a few years off to start a professional job and decides she wants to pursue her degree, later on, the 529 savings plan remains as is for her use for educational expenses.
If your child decides she does not want to go to a two- or four-year school, the money is not lost. You can switch beneficiaries to another child or loved one, if necessary. If you decide you'd like to keep the money yourself, you can withdraw the money, but it is subject to income tax and penalties.
The entire withdrawal is reported as income, and you'll owe a 10 percent penalty.