The Terms to Know When Saving with a 529 Plan

As you learn more about saving for college with a 529 college savings plan, you may come across words or phrases that are new to you. Let’s break down those terms so you can make the best choices for you and your family when saving for college.

529 Plan

A 529 plan is a state-sponsored investment vehicle designed to help families finance higher education while providing special tax breaks. There are two types of 529 plans: prepaid tuition plans and college savings plans. Most states offer at least one of these options, and Bright Start is a college savings plan. Tax advantages, investment options, restrictions, and fees can vary from one plan to another, and parents or guardians should research the best option for their families.

Automatic Investment Plan

An automatic investment plan (AIP) allows investors to contribute money to an account at regular intervals to be invested in a preset strategy or portfolio. Funds can be automatically deducted from an individual’s paycheck or deducted from a personal account.

Beneficiary

The beneficiary is the student listed on the account who will benefit from the college savings plan. They’re the individual whose college or higher education expenses you are saving for.

Portfolio

A portfolio is an investment fund consisting of a collection of underlying mutual funds that might invest in stocks, bonds, and/or money market type investments.

Qualified Education Expenses

These are approved expenses for college savings plans, including but not limited to tuition, fees, books and supplies, equipment, room and board (if enrolled at least half-time) and repayment of up to $10,000 in student loan expenses. Withdrawals from a college savings account used to pay for qualified expenses are tax-free.1

Qualified Withdrawal

A qualified withdrawal is any money taken from a college savings account used at eligible institutions for qualified education expenses. These payments are generally tax-free.

If you use 529 plan funds for non-college related expenses, it becomes a non-qualified withdrawal, and the earnings portion of the withdrawal is subject to income tax and an additional 10% penalty tax.

Saving for college shouldn’t be hard, and Bright Start doesn’t want investing terms to become barriers to saving. Now that you know the terms, take the next step and start learning about 529 plans 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.