Tax Benefits of 529 College Savings Plans

529 College Savings Plan Tax Benefits

How 529 Plans Work

• Contributions are made with after-tax dollars
• Investments grow tax-deferred
• Withdrawals for qualifying education expenses are completely tax-free

Federal Tax Treatment

• No federal deduction for contributions
• Tax-free growth and withdrawals for qualified expenses

State Tax Deductions

Many states offer a deduction or credit for 529 contributions:

• Illinois: Deduct up to $10,000/year ($20,000 for married couples) for Illinois Bright Start, Bright Directions, and CollegeIllinois! plans

Qualifying Education Expenses

• Tuition, fees, books, supplies, equipment required for enrollment
• Room and board (if enrolled at least half-time)
• Computers and technology for school
• K-12 tuition: Up to $10,000/year per student
• Apprenticeship programs
• Student loan repayment: Up to $10,000 lifetime per beneficiary

Superfunding (5-Year Gift Averaging)

• Contribute up to $95,000 ($190,000 for couples) at once
• Treated as 5 years of annual gifts
• Removes funds from estate while maintaining control

New: Roth IRA Rollover

After 15 years, unused 529 funds can be rolled into a Roth IRA:

• Up to $35,000 lifetime per beneficiary
• $7,000/year limit (Roth contribution limit)

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Saving for college? A 529 plan with state tax deductions is almost always the right choice.