How a 529 College Savings Account Differs from a Traditional Savings Account
If you’re researching how to pay for college, you may have found that a 529 college savings account is a good option. But how is it different from a regular savings account?
A 529 plan is a tax-advantaged investment account designed to help pay for future education. It works similar to a 401k where your contributions are invested in portfolios that invest in mutual funds, exchange-traded funds (ETFs), and other similar investments. Your contributions and earnings have the potential to grow with no federal or state income taxes deducted each year, providing the potential for additional investment growth. This unique savings tool is designed for education savings, and you can withdraw funds tax-free if they are used to pay for qualified higher education expenses at most accredited colleges and universities, and many technical and career schools.1
Some states also offer tax benefits. For instance, if you are an Illinois taxpayer and invest in a Bright Start 529 College Savings account, your plan contributions are tax deductible up to $10,000 per year ($20,000 if married and filing jointly).2 And you’ll pay no state income tax on any earnings and withdrawals used for Illinois qualified college expenses like tuition, books, or room and board.1
Almost anyone can open and contribute to a 529 account, and there are no income limits. When you invest with Bright Start, you control the account. There’s no required minimum contribution amount, no fee to open an account, no annual account service fee, and a high maximum account balance. Plus, there’s no requirement for ongoing contributions. You can open an account with just $25, make contributions over time at your convenience, and set up recurring deposit from your bank account or paycheck.
Bottom line, a 529 account is an investment that suits your family’s needs when saving for college. You can learn more about Bright Start’s additional benefits by going here.
1Withdrawals used to pay for Illinois Qualified Expenses are free from federal and Illinois state income tax. Illinois Qualified Expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance; certain room and board expenses incurred by students who are enrolled at least half-time; the purchase of computer or peripheral equipment, computer software, or Internet access and related services, if used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution; certain expenses for special needs services needed by a special needs beneficiary; apprenticeship program expenses; and, repayment of up to $10,000 of qualified education loans.
Illinois Qualified Expenses do not include expenses for tuition in connection with the Beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school. The amount of any deduction previously taken for Illinois income tax purposes is subject to recapture in the event an Account Owner takes a Nonqualified Withdrawal or Illinois Nonqualified Withdrawal from an Account or if such assets are rolled over to a non-Illinois 529 plan.
2 An individual who files an individual Illinois state income tax return will be able to deduct up to $10,000 per tax year (up to $20,000 for married taxpayers filing a joint Illinois state income tax return) for their total, combined contributions to the Bright Directions Advisor-Guided 529 College Savings Program, Bright Start Direct-Sold College Savings Program, and College Illinois during that tax year. The $10,000 (individual) and $20,000 (joint) limit on deductions will apply to total contributions made without regard to whether the contributions are made to a single account or more than one account. The amount of any deduction previously taken for Illinois income tax purposes is added back to Illinois taxable income in the event an Account Owner takes a Nonqualified Withdrawal from an Account or if such assets are rolled over to a non-Illinois 529 plan.
If Illinois tax rates have increased since the original contribution, the additional tax liability may exceed the tax savings from the deduction.