Illinois offers two 529 college savings plans -- one direct-sold and the other advisor-sold. The plans offer relatively high maximum contribution limits at $400,000, and Illinois allows an annual tax deduction of $20,000 per beneficiary for 529 contributions, among the highest in the nation. Whether or not you chose to go the advisor-sold route, you can still use the SmartAdvisor matching tool to get paired with a financial expert who can help you create the best college savings strategy for your needs.
|Plan Name||Program Type||How to Enroll||Fees|
|Bright Start Illinois 529 College Savings Plan Read Review||College Savings Plan||Direct-Sold||0.11% - 0.83%|
|Bright Directions Advisor-Guided 529 College Savings Plan Read Review||College Savings Plan||Advisor-Sold||0.32% - 3.50%|
Bright Start Illinois 529 College Savings Plan
The Bright Start 529 Plan that the state of Illinois sponsors allows you to start investing in your child’s future education with as little or as much as you want. The plan offers several investment options including portfolios that automatically rebalance their asset allocation to take on less risk as your child gets closer to college age. Leading investment research firm Morningstar gave this plan a Gold rating.
How Do I Enroll in the Bright Start Illinois 529 College Savings Plan?
You can enroll in the Bright Start Illinois 529 College Savings Plan online or by mail. The digital process should take only a few minutes if you’ve gathered the following information about yourself and your beneficiary:
- Birth dates
- Social Security or tax identification number
- Bank account and routing number if making initial contribution electronically.
Furthermore, you can download an enrollment kit and mail it in once completed. You don’t need a minimum opening balance. And any U.S. citizen or resident alien who is of legal age can open an account as long as personal Social Security or tax identification numbers are valid.
How Much Does the Illinois College Savings Plan Cost?
Each investment portfolio in the Bright Start Illinois 529 College Savings Plan charges a total annual asset-based fee, which is also reported as a total expense ratio for each portfolio. This fee is not paid directly out your pocket, but your account bears a pro-rata share depending on the portfolio you invest in as well as the expenses of the underlying mutual funds that it’s built with.
But compared with direct 529 plans other states sponsor, the Illinois program’s fees range from very low to moderate across the board. The total expense ratio currently stretches from about 0.11% to 0.83%. Each portfolio’s total expense ratio combines the program management fee, the state fee and underlying fund expenses.
Tax Benefits of the Bright Start 529 Plan
Illinois taxpayers can deduct contributions of up to $10,000 ($20,000 if married filing jointly) when calculating their Illinois state taxable income. This limit covers contributions to all Illinois-sponsored 529 plans including the advisor-sold plan.
But regardless of residency, 529 college savings plans offer distinct tax benefits. When you contribute toward a 529 plan, your money grows tax-deferred. This means that earnings you make in the market won’t face any federal or state income tax as long as they’re invested in the plan. So your money can make the most out of compound interest. And withdrawals are tax-free too as long as you use them for qualified higher education expenses such as tuition and books your beneficiary needs for enrollment at an eligible school.
However, you or your beneficiary may face some tax consequences if you don’t use the 529 plan funds as they were intended to be used. If you take out money from the 529 plan for basically anything other than a qualified educational expense, you’ve made a nonqualified withdraw. This may be subject to federal and local income tax as well as a 10% penalty. In addition, any Illinois state-tax deductions you claimed from your contributions will be added back to your state taxable income.
What Are My Investment Options?
The Bright Start Illinois 529 College Savings Plan allows you to invest in a variety of portfolios designed for savers with different levels of risk and investment knowledge. Those who aren’t too familiar with investing may be attracted to the the plan’s age-based portfolios. You can choose one of these options based on your child’s age, your risk level and your choice of investment strategy.
When you first open the account, the portfolio will aim for maximum growth by investing most of your contributions in stock funds. It’ll then automatically switch its asset allocation in time. As your beneficiary gets closer to college age (17+), the portfolio will focus more on generally safer investments like bond funds in order to aim for protecting your earnings while getting a steady return.
And although age-based portfolios are common among 529 plan investment menus, the Illinois program offers some added flexibility and the ability to customize these options a little more to reflect your preferences.
Age-based portfolios in the Bright Start plan are broken down into three risk levels: conservative, moderate or aggressive.
You choose one based on your risk tolerance. The portfolio will generally move from being focused on growth to preserving earnings. But the portfolio will offer a fair amount of exposure to investments that reflect your choice of risk. For example, let’s say you have a high risk tolerance and choose the Aggressive track. By the time your beneficiary turns 17, the portfolio will be investing 30% of your money in stocks. Its conservative counterpart would be invested in just 10% in stocks by then.
In addition, you have two different menus of age-based portfolios to choose from. One utilizes index funds by Vanguard. The other uses funds from established investment management firms, including Vanguard, BlackRock, T. Rowe Price and DFA.
Furthermore, you can invest in target portfolios. Unlike their age-based counterparts, these options have an asset mix that stays constant. And as its name implies, these portfolios are built with an investment mix based on a specific risk profile and objective. If you have a low risk profile, for example, you may be interested in a target portfolio that invests in only bond funds and cash.
In addition, you can choose from a set of individual fund portfolios. Each offers exposure to different asset classes ranging from growth-oriented ones like equity and real estate to more conservative ones like fixed-income. You can choose to invest in one or find a financial advisor to help you build a portfolio utilizing multiple individual funds based on your unique risk tolerance and goals.
How Do I Withdraw Money from the Illinois 529 Plan?
You can request a withdrawal by logging on to your account. You can also download a withdrawal request form and mail it in. Payments can be made to yourself, your beneficiary or an eligible educational institution.
Bright Directions Advisor-Guided 529 College Savings Plan
If you’re hesitant to invest in a 529 plan on your own and prefer professional assistance, the Bright Directions Advisor-Guided 529 College Savings Plan may be a good fit for you. This plan features the guidance of a professional financial advisor and a different investment menu to choose from. However, the advisor plan offers the same tax benefits as the direct option, which means you can still make tax-deductible contributions.
How Do I Enroll in the Bright Directions Advisor-Guided 529 College Savings Plan?
You can open an account with the Bright Directions Advisor-Guided 529 College Savings Plan through a qualified financial advisor. Your advisor can guide you through the enrollment process and help you choose an investment option based on your individual risk tolerance and goals.
How Much Does the Illinois Advisor-Sold 529 Plan Cost?
The cost of investing in the advisor-sold 529 college savings plan sponsored by Illinois depends on your portfolio choice as well as its share class.
Your advisor can help you choose from fee structure (share class) A, C, E or F for any portfolio you decide to invest in. Fees vary across share classes. For example, Class A portfolios will levy a sales charge that can range from 0 to 3.50%. The sales charge is taken from each contribution. Other fee structures don’t have a sales charge but they do have an annual account servicing fee.
In addition, each portfolio charges a total annual asset-based fee which varies depending on your portfolio option and share class. This total fee currently ranges from 0.32% to 1.44%.
Sales charges may be reduced or waived under certain circumstances. In some cases, portfolios that don’t carry a sales charge will set one off if you transfer your balance into a specific portfolio. Ask your advisor about all fees that relate to your particular circumstances and be sure to run any investment change decisions with your advisor before you take action.
Tax Benefits of the Bright Directions Advisor-Guided 529 College Savings Plan
The Bright Directions 529 plan offers the same tax benefits as its direct-sold counterpart. For example, your contributions grow tax-exempt and your withdrawals are tax-free if you use the money to fund qualified higher education expenses.
However, you may run into the same issues for making nonqualified withdrawals. Speak to your advisor about the tax implications of any nonqualified withdrawal based on your individual situation. In addition, you can discuss other benefits that may appeal to you. For example, 529 college savings plans allow for different ways you can give money to students while avoiding gift tax.
What Are My Investment Options?
The advisor-sold plan sponsored by the state of Illinois offers portfolios similar to those found in the direct-plan. However, an advisor can help you build an investment roadmap unique to your risk profile and financial goals.
Your options include more than 30 individual portfolios with underlying mutual funds that established financial services firms like T. Rowe Price, PIMCO and DFA manage. These offer exposure to a diverse set of asset classes including equity, fixed-income and real estate, as well as stocks in companies the fund manager has deemed socially responsible. Based on your risk appetite, an advisor can help you choose from one or more individual portfolios that may meet your financial goals.
If you’re working with a registered financial advisor or fee-based planner, you can invest in exchange-traded funds (ETF) that Vanguard manages. Each invests in different asset classes. ETFs track a benchmark index based on a specific asset class like stock, and they tend to carry lower fees than mutual funds.
Your advisor can also help you choose from seven target portfolios designed for different risk levels ranging from conservative to aggressive. The most aggressive, for example, invests entirely in U.S. and international stocks along with real estate.
In addition, you can also invest in age-based options that automatically change their asset allocation to take on less risk as your beneficiary gets closer to college age.
How Do I Withdraw Money from the Illinois Advisor-Guided 529 Plan?
You can take money out of the Bright Directions 529 plan by logging on to your account or by completing a withdrawal request form. However, you should reach out to your financial advisor before making any withdrawal in order to discuss possible tax implications and how best to use the funds.
If you’re not sure how to go about seeking a professional, you can use our free SmartAdvisor tool which links you to advisors in your area based on your financial situation and savings goals. You can then review their qualifications and set up interviews to narrow down your options.