Grandparent 529 College Plan – Choosing a Plan in Illinois
Hi Terry,
After recently learning about FAFSA simplification (Thanks to one of your Ask Terry responses), my wife and I are considering starting 529 College Plans for our two grandchildren (ages 8 and 3).
As Illinois residents, we are now trying to understand the relative merits of Illinois Bright Start versus ‘Vanguard’ (Nevada) plans. It appears that the Vanguard plan provides more independent investment opportunities, but it lacks the Illinois state income tax deduction for contributions offered by Bright Start. We are less clear regarding the rules for Illinois state income tax when it’s time for qualified withdrawals. Our tentative understanding is that qualified withdrawals from Illinois Bright Start are not subject to Illinois State income tax, but distributions and capital gains accrued inside the Vanguard plan will be subject to Illinois State tax (as ordinary non-retirement income) payable by us when qualified withdrawals are taken. If this is correct, then accurate tracking of cost basis would be needed for the Vanguard plan.
Finally, it appears that the two plans follow the same Federal income tax rules.
Is our understanding of the above rules correct? Is there anything else we should consider before choosing a plan (For simplicity, it’s OK to assume (1) our contributions will not exceed our annual Federal gift tax exclusion and (2) we will not move to another state)?
Thank you, Terry! Have a Healthy and Happy 2023!
Terry Says
I learned something today. I was going to say you’re wrong that withdrawals are taxed by Illinois. But I just researched the topic and see conflicting opinions. I’m inclined to believe the chart included here from SavingforCollege.com, which is ambiguous as to Illinois taxing withdrawals from out-of-state plans for state tax purposes. I’m going to dig further into this. Under Federal law, of course, all qualified withdrawals are exempt from Federal income taxes.
Otherwise you have the facts completely correct. It’s a good thing that BrightStart has gotten good ratings in recent years. Don’t buy through a broker, just go direct to www.BrightStart.com if you choose the Il plan and the tax deduction. And remember, the allowable gift jumps to $17,000 per recipient.
You have everything else correct as well.
