Saving for college… It’s not really something on the forefront of your mind, but now’s the time to start! Lauren Hunt, a local wealth advisor and Kidlist sponsor, put together this wonderful guide to Illinois college savings plans for all of us! She breaks it all down and has some great tips. If you want more details about saving for college please email or call her directly. She’s happy to help!
Lauren Hunt, CFP®
Pinnacle Financial Group, LLC
823 Burlington Avenue
Western Springs, Illinois 60558
P: (708) 246-6262
F: (708) 286-1400
Current Illinois College Saving Plans:
Bright Start & Bright Directions College Savings –Both of these programs are considered 529 savings programs. These plans are similar to other investment accounts such as a 401k; the plans allow you to invest money in a set group of investment options (e.g. mutual funds, ETFs, etc.) and the investment value will go up or down based on the performance of the investment options selected. Money invested in 529 savings plans grows tax free, provided the funds withdrawn are used for qualified educational expenses. The Illinois Bright Start and Bright Directions programs each have a different set of investment options. If you prefer the Bright Directions funds, you will need the help of a Financial Professional to enroll. Only Bright Start offers direct enrollment.
College Illinois! 529 Prepaid Tuition Program – Prepaid Tuition programs are often described as purchasing future tuition credits at today’s costs. In the past, Illinois’ plan has been sold at today’s tuition costs plus an actuarial fee. College Illinois! has an open enrollment period for all ages except newborns which closed in May of 2016. The pricing for the next enrollment period is not yet available so it’s unclear if an additional actuarial fee will be added to the tuition costs moving forward. One other important factor to be aware of with this particular 529 plan is that the state is not required to provide funding if the program is ever unable to meet its obligations. The governor can request funds but the legislature is not required to provide the additional capital.
Generally speaking, the return you receive on the investment in these contracts is the difference in the tuition prices paid today compared to the actual future tuition costs.
The majority of my clients elect to move forward with a college savings program in Illinois so the rest of the information will be related to those plans only.
Funding Your Plan:
Once you have decided on a plan and enrolled it’s time to start contributing. Investors have the option of setting up regular contributions to these plans or making ‘one off’ investments. Keep in mind that contributions are not limited the account owner. It’s possible for grandparents and others to contribute as well.
The question everyone always asks next is how much should I be contributing. The frustrating answer is as much as you can without cutting into your other savings goals. As you evaluate just how much you can redirect to college savings keep in mind that your kids can borrow money for college, but you cannot borrow money for retirement.
If you want a more specific estimate of how much you would need to save each month based on your child’s age and projected school, check out the calculator linked below. Just be warned, sometimes the numbers can be very intimidating.
One final funding tip – don’t overfund a 529 plan. If money is withdrawn for anything but college there is a 10% penalty on the withdrawals of earnings.
Invest Your Money
If you have elected the investment account 529 you will need to choose how to invest your contributions. At the core you have two options – pick from a list of mutual funds or pick an age weighted plan. The age weighted plans are very similar to target dated retirement funds – they start off more aggressive (more stocks) and get more conservative (more bonds) as the target date / college age approaches. If you aren’t going to rebalance and review your fund choices regularly, I suggest you look into the age weighted plans
Take Your Tax Deduction!
If you are an Illinois resident and you invest in one of the Illinois 529 plans, you can deduct up to $20,000/year (Married Filing Jointly) from your Illinois state taxable Income.
If you have already invested in a different state plan you can claim the deduction on contributions rolled / moved into an Illinois plan. So for example, if you invested $15,000 into another state’s 529 plan and that grew to be $20,000, you could take a deduction of $15,000 if the entire amount was rolled into an Illinois 529 plan. If you have more than $20,000 of contributions in another plan consider rolling only enough into the Illinois plan each year in order to take full advantage of the deductions.