Illinois residents can invest in almost any state’s 529 plan to cover college education expenses. Still, they are eligible for a state income tax deduction if they contribute to an in-state plan.
Illinois administers two 529 plans, the Bright Start Direct-Sold College Savings Program and the Bright Directions Advisor-Guided College Savings Program, and one prepaid tuition plan, the College Illinois Prepaid Tuition Program. There are no minimum contributions on any of these tax-advantaged plans.
The Bright Start 529 plan is a direct-sold 529 plan that received a Gold rating from Morningstar in October 2019, though Morningstar downgraded the plan to a Silver rating in 2022.
Illinois residents who use an in-state 529 plan may deduct up to $10,000 ($20,000 if married filing jointly) of annual contributions from Illinois taxable income. Eligible contributions include the principal portion of a rollover contribution. All Illinois residents are eligible for the state income tax deduction, regardless of whether or not they own the 529 plan account.
Illinois also offers a state income tax benefit for employers who match employee contributions to an Illinois 529 plan account. Employers may claim a state income tax credit of up to 25% of matching contributions per employee, with an annual maximum credit of $500.
A state income tax benefit should be one of many considerations when selecting a 529 plan. Families should also compare fees, investment options, and historical performance of out-of-state 529 plans.
Illinois families can open a Bright Start College Savings account by completing an application online. The 529 plan account owner must provide their name, Social Security Number (SSI) or Individual Taxpayer Identification Number (ITIN), date of birth, mailing address, telephone number and email address, and the beneficiary’s SSI or ITIN and date of birth for enrollment.
Illinois families looking for professional guidance on college savings might consider the Bright Directions advisor-sold 529 plan.
Illinois residents can claim a state income tax deduction for contributions to any in-state 529 plan.
The most significant difference between Illinois’ two 529 college savings plans is that the Bright Start plan is a direct-sold 529 plan, and the Bright Directions plan is an advisor-sold 529 plan. Direct-sold plans generally have lower fees than advisor-sold plans. This is partly because advisor-sold 529 plans charge a sales commission based on the share class selected. Advisor-sold plans are also more likely to include actively managed funds, which have higher fees than passively managed index funds.
But, with a direct-sold 529 plan, the account owner is responsible for the investment selection and asset allocation. Both Illinois 529 plans offer age-based portfolios, which start heavily invested in riskier investments such as stocks and ETFs and automatically move toward more conservative options to reduce risk as the beneficiary gets closer to college. This is a good option for investors who prefer a “set it and forget it” strategy for their college savings. Other options that do not automatically adjust allocations include target portfolios that aim to meet an investment objective based on a desired level of risk and individual fund options. And, of course, both 529 college savings plans allow investments to grow tax-free, a standard benefit of 529 plans.
The following table highlights the features offered by the Illinois Bright Start direct-sold 529 plan and the Bright Directions advisor-sold 529 plan.