529 Plan Tax Benefits

Your Bright Start earnings grow federal tax free! That means you pay no taxes on investment earnings.

If you live in Illinois, you also get some added state tax benefits. Contributions to your Bright Start account are tax deductible—up to $10,000 per parent, per year ($20,000 if married and filing jointly1)—and you pay no state tax on earnings and withdrawals that cover qualified expenses2. You can also deduct the contribution (but not earnings) portion of rollovers from other state 529 plans.

"When I put money into Bright Start accounts for my six grandchildren, I can control where the money goes but the IRS doesn't consider it part of my estate anymore. It's the best of both worlds."

Thomas Malone
Elmwood Park, IL

Of course, if you spend the money for purposes other than college, you must pay taxes on your earnings and an additional 10% federal tax. And the amount of any deduction previously taken for Illinois income tax purposes is subject to recapture if assets are rolled over to a non-Illinois 529 plan. Other states offer similar benefits to their residents, so if you live outside of Illinois it's a good idea to do some comparison shopping.

Gift and Estate Tax Planning Benefits

Parents, grandparents, relatives and friends take note: Not only does a contribution from your estate make a great gift for any student, it offers some big 529 plan tax benefits.

  • Contribute up to $14,000 ($28,000 for married couples) per student each year, or up to $70,000 ($140,000 for married couples) prorated over a five-year period to someone's existing account, without incurring a federal gift tax
  • Grandparents, relatives and friends can open their own Bright Start accounts, contribute $14,000 ($28,000 for married couples) per student each year, or up to $70,000 ($140,000 for married couples) prorated over a five-year period, and not incur a federal gift tax
  • Contributions to 529 plans are also excluded from an account owner's estate when taxes are assessed, making Bright Start an attractive option for grandparents3.

1. Based on informal guidance from the Illinois Department of Revenue that is not binding on the Department. Tax Deduction limits apply to the total, combined Contributions to the Advisor-sold Plan, the Bright Start College Savings Program—Direct-sold Plan, the Bright Directions College Savings Program and to College Illinois! during that tax year.
2. Subject to recapture in certain circumstances.
3. If the account owner dies before the end of the five year period, a prorated portion of the contribution allocable to the remaining years in the five year period, beginning with the year after the contributor’s death, will be included within his or her estate for federal tax purposes.

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