A 529 plan is a college savings program where parents, grandparents and friends can put funds aside for a child’s college that will grow tax-free. Think of it as similar to a Roth IRA, where you put away after-tax dollars in a designated fund and, so long as you meet the requirements, you do not have to pay taxes on the earnings.
You then redeem the funds for your child’s college costs without any further tax (assuming the funds are used for the child’s education). Illinois residents enjoy an added bonus: If you sign up for the Illinois 529 plan, your contributions are also exempt from state tax.
So instead of a Groupon savings of 50 percent, you get instant Illinois savings of 5 percent on your investment. For example, if you put away $5,000 this year, then you save $250 in taxes or if you set aside $10,000, then you save $500.
Debating whether to put the funds in a regular savings account? The benefits of this college savings account outweigh any other options that I have seen.
In addition, the Illinois Treasurer’s office has strengthened the state’s 529 plan and now offers low-cost index funds as an investment choice. Be sure to visit brightstartsavings.com and go through the Direct program. It charges the lowest fees, and in my opinion, offers some very good investment choices.
Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisors before investing.