A Publication of WTVP

For many people, the thought of paying rising college education costs for their children seems staggering. Fortunately, there are many funding options available to help save for your child’s college education. One of the more popular is the 529 plan. All 50 states offer their own version of a 529 plan, and in most states, you do not have to be a resident to contribute to their plan (though there may be tax incentives to contribute to your own state’s plan).

A 529 plan, also known as a Qualified Tuition Program, is a state-sponsored plan that allows your contributions to grow tax-free. Withdrawals from the plan are also tax-free when used to pay for qualified education expenses, including tuition, fees, books, supplies, room and board. But what happens if your son or daughter gets the wonderful news that they have received a full-ride scholarship? The owners of the account (presumably the parents or grandparents) can keep it intact for graduate school, or they can choose to transfer the funds to another child’s 529 plan.

Many parents want to know if they can take the excess amount in the account back without penalty. Typically, any withdrawal taken from a 529 plan for non-educational expenses is subject to a 10-percent penalty, plus the income portion is included in the gross income of the beneficiary. However, the IRS does provide a little-known benefit to accommodate individuals who receive tax-free scholarships: you can take a distribution up to the scholarship amount without being subject to the 10-percent penalty. Keep in mind, however, that you will still be required to pay any applicable taxes based on the growth in this account. If you elect to take advantage of this technique, make sure you explain the situation and give all pertinent forms to your accountant so that it is documented properly on your tax return.

Anyone can open a 529 savings account without gift tax consequences, regardless of income level, and contribute up to $13,000 ($26,000 for married couples) a year or more, as long as the total over a five-year period does not exceed $65,000 ($130,000 for married couples). Many 529 plans make it easy for you to start investing with low minimum contributions and automatic monthly contributions from your bank account as an option.

Illinois residents have access to two college 529 savings plans, Bright Start and Bright Directions. The Bright Start plan is more of a do-it-yourself option. If you enroll online, it claims that it takes as little as $25 and about 15 minutes. You may invest in age-based portfolios, choice-based portfolios or a combination of the two. Additionally, you can choose an index strategy, blended strategy, or a combination of the two. The portfolios are managed by Oppenheimer Funds, The Vanguard Group and American Century Investments. Bright Directions is an advisor-sold plan specifically for those who manage their investments through a professional advisor. This plan allows your advisor the flexibility to build your college savings as aggressively or conservatively as you see fit. iBi

» Highlights of 529 Plans

Visit for more information on 529 plans, as well as helpful college funding calculators.