529 Programs - Generally
529 plans are plans created in line with the Internal Revenue Code Section 529. The plans are generally considered tuition savings plans and are one tool that can be used in estate planning and financial strategies alongside other tax favored savings schemes.
The funds contributed to the 529 account may be used by the beneficiary to pay for expenses related to higher education. Beneficiaries may attend any college in the United States (public or private), as well as some foreign schools, vocational or Apprenticeship programs. Some applicable expenses include:
- room and board
- computers or other necessary equipment or software
- internet access
- expenses for special needs services for the beneficiary
- payments of qualified student loans
Withdraws from the plan or plan disbursements for anything not authorized under the plan will likely result in an obligation to pay all accrued tax on the disbursement plus a penalty. However, it should be noted that the plan beneficiary can generally be changed at will.
There are some risks involved in enrolling in a 529 account. Because it is an investment account, the value of your account may decrease, and you could lose money. There may also be changes to State or Federal tax laws regarding 529 accounts. The program itself may change, including changes to fee amounts and/or changes to investment Portfolios. There may also be an effect on the account owner's or beneficiary's eligibility for financial aid or other benefits.
Illinois 529 - Bright Start
A Bright Start 529 account is a college saving program that is sponsored by the State of Illinois. The Illinois State Treasurer acts as trustee of these accounts. When you open an account, you will choose a beneficiary who will be able to withdraw funds from the account to pay for qualified expenses related to higher education. The maximum amount you can contribute per beneficiary is $500,000.
When you enroll, you will be able to choose which Portfolio(s) your contributions will go into. The account owner should reassess from time to time if they need to make changes to which Portfolio(s) their contributions go toward, as each comes with varying risk and reward potential. There are age-based index funds available.
Funds contributed to a Bright Start 529 account receive some tax benefits. Contributions, dividends, interest, and gains are not taxed while in the plan. Contributions may also be eligible for an Illinois State income tax deduction up to $10,000 per year ($20,000 if married and filing jointly).
Iowa 529 - College Savings Iowa
Like the Illinois Bright Start 529 plan, contributions to the College Savings Iowa Plan are untaxed. Withdraws for the benefit of the plan beneficiaries to pay for qualified education expenses may usually be made without paying federal or state income taxes.
Iowa taxpayers can also receive deductions on their Iowa state income taxes for their contributions to a College Savings Iowa account. For 2022, up to $3,552 can be deducted per beneficiary (doubled if filing jointly as a married couple). This amount is adjusted annually for inflation. Up to $420,000 can be contributed into a College Savings Iowa account per beneficiary. Additionally, you can contribute up to $80,000 per beneficiary to an College Savings Iowa account per year without having to pay gift tax on that money. Similar to Illinois' Bright Start plan, there are different investment Portfolios to choose from, with differing levels of risk and reward potential.
For more information on using 529 plans in the context of your planning, please contact us. We'd be happy to help.