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Your Child is Going to College—Are You Ready?

While attending grammar and high school, your children are continually preparing for the challenges of postsecondary education. Although the transition from high school to college can be difficult, your children are generally well-equipped and ready to tackle the challenges that lie ahead. However, the cost of postsecondary education is rising, and parents should be sure they are as prepared financially as their children are academically. Fortunately, there are many payment and savings options for parents that can make the task of paying for college less onerous.

What are Section 529 Saving Plans?

A Section 529 saving plan is an educational savings plan operated by a state or educational institution. The purpose of the plan is to help families save funds for future college costs. Because these plans are organized at the state level, there are differences from one plan to the next. Each plan has it's own investment pool or products, anyone interested in participating in a plan should contact their tax preparer or account representative to verify state-specific information. The following are general benefits of a Section 529 savings plan:

Tax Incentives

• All of the investments made by the donor grow tax-free, and distributions to pay for the beneficiary’s college are distributed tax-free. Although there is no federal deduction, many states offer immediate deductions or credits for contributions. For example, Illinois allows a deduction up to $10,000 ($20,000 for married taxpayers) per year for contributions to Section 529 saving plans (Bright Start, Bright Start Directors and College Illinois Prepaid Tuition Program). There is no carryforward for excess contributions. It should also be noted that a few states impose a tax on distributions made from out-of-state plans.

• What happens if your child is currently in college? Instead of paying expenses from a savings account, contribute money to an Illinois Section 529 saving plan to get the state tax deduction or credit (currently available in 31 states). Then, use the same funds to pay the college costs as most states do not impose a minimum holding period (including Illinois).

Controlled Investment

• Generally, the beneficiary has no rights to the fund. The owner of the account is in control of the investments and will determine when the withdrawals will be made and for what purpose. The tuition paid by the plan can be for any accredited college or university (public or private) and within any state.

• The owner also has the right to make “nonqualified” withdrawals at any time. The earnings on these withdrawals are subject to income tax and a 10% penalty (plus any state recapture income from previous deductions). The penalty is not assessed if the beneficiary receives a scholarship, dies or becomes disabled.

Straightforward Funding

• An advantage of a Section 529 saving plan is its simplicity in both enrolling and managing the funds. Contributions can be made at the donor’s discretion and can even be set up for automatic installments. The state treasurer’s office or an outside investment company, as decided by the donor, can manage the plan.

• Funds can also be rolled over from one Section 529 saving plan to another, even from state-to-state. The beneficiary can also be changed to another qualifying family member. If there are excess funds or the beneficiary decides not to attend college, the balance can be made available to a second family member. There is also no stipulation as to whom may be the beneficiary; one can even be created for the donor.

Contribution Planning

• Section 529 saving plans offer several gifting opportunities to help shift money to younger generations. Contributions of $12,000 ($24,000 for married taxpayers) can be gifted to the plan each year without incurring gift tax. Furthermore, a contribution of $60,000 ($120,000 for married taxpayers) can be made in one year and elected to be treated as a five-year gift exclusion.

• Although the investment limit varies between states, the maximum contributions are generally substantial (most over $300,000). Finally, unlike Coverdell education savings accounts, there are no adjusted gross income limitations. 

How Have They Changed?

In August 2007, Illinois Governor Rod Blagojevich enacted legislation to remove the tax imposed on distributions made from out-of-state Section 529 savings plans. This act amends the Illinois Income Tax Act and will apply to taxable years beginning on or after January 1, 2007. Previously, Illinois residents would have to include distributions from out-of-state Section 529 savings plans in their Illinois adjusted gross income. This change was made to help mitigate the burden of saving for increasing college expenses.

For more information, contact Jeff Thomas at 312-980-3219 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.