Ask Terry Questions Can’t use Illinois Bright Start for high school?

Can’t use Illinois Bright Start for high school?

By Terry Savage on February 27, 2018 | College Savings / Student Loans

Terry, have a question about the Illinois 529 plans and the new federal tax law. The new tax law states that 529's can be used to pay K through 12 at private institutions. I have two sons currently in catholic grade school. Can I now withdraw from my Bright Start accounts and pay their tuition for grammar school with no penalty? I had heard that the State of Illinois was trying to stop this because they would lose money. I have had these accounts for 11 years and 9 years respectively..

Terry Says

I was astounded when I first heard this.  But the Treasurer of the state of Illinois issued a press release saying that the money can only be used to pay for qualified "higher education" expenses -- meaning college!  Although the Federal law says yes, the state says NO! According to College Planning expert Mark Kantrowitz:    "The new tax law changes affect the treatment of 529 plans under federal law, but not under state law. In particular, while a distribution from a 529 plan to pay for K-12 tuition is considered a qualified expense under federal law if used for tuition of up to $10,000 per year per beneficiary, it may not be a qualified expense under the state law that defines Illinois 529 plans. In particular, the Illinois Treasurer has issued a press release that indicates that such distributions are considered non-qualified under state law. Not only does this mean that the earnings portion of the distribution will be considered taxable income under state law and also subject to a 10% tax penalty, but recapture rules (see the Legal Notice) mean that state income tax deductions corresponding to the distribution will be recaptured on the beneficiary's state income tax return."  

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