Understanding 529 Plans: Everything You Need to Know

Published November 24, 2025

Last Modified Date November 24, 2025

For many families, the thought of paying for college can feel overwhelming. Tuition continues to rise, up more than 90% over the past 20 years, and balancing today's expenses with tomorrow's dreams isn't easy.¹

If you're feeling like you've started late, here's the good news: it's not too late to make meaningful progress. A 529 plan can help you build a college savings strategy that fits your family's needs, even if you're starting further down the road. With flexible contribution options, tax advantages, and even catch-up strategies for late starters, a 529 can be one of the smartest financial moves you make for your child's education.

What Is a 529 Plan & How Does It Work?

A 529 plan is a state-sponsored, tax-advantaged investment account designed to help families save for education. The Bright Start 529 College Savings Plan is Illinois' state-sponsored direct-sold savings option, consistently recognized among the nation's highly rated 529 plans.²

The two types of 529 plans we are discussing are direct sold and advisor sold:

• Direct-Sold 529 Plans

  You open and manage the account yourself directly with the plan's program manager. These plans are known for their lower costs, making them an effective choice for self-directed investors. The Bright Start 529 Plan is Illinois' direct-sold option, offering a range of high-quality portfolios, including enrollment year, static, and individual fund options.

• Advisor-Sold 529 Plans

  You open an account through a licensed financial advisor or broker. These plans offer professional guidance and personalized investment advice, but they may include sales charges and fees to compensate the advisor.

Tax Advantages, Contribution Rules & Estate Benefits

One of the most powerful features of a 529 plan is its tax benefits:

• Tax-deferred growth – Earnings in your account grow tax-deferred.
• Tax-free withdrawals – As long as funds are used for qualified education expenses, withdrawals are tax free.
• Illinois state tax deduction – If you file an Illinois tax return, you may deduct up to $10,000 per year ($20,000 if married filing jointly) for contributions into a Bright Start 529 account.

When it comes to contributions, flexibility is key. Bright Start 529 has no ongoing contribution requirements and contributions can be made as lump sum deposits and recurring contributions – with the option to automatically increase your recurring contribution annually. Families can even take advantage of superfunding, which lets you contribute up to five years' worth of the annual gift tax exclusion at once. That means parents or grandparents could front-load an account without triggering federal gift taxes.

Another noteworthy feature: recent federal rules now allow rollovers of unused 529 funds into Roth IRAs, up to $35,000 per beneficiary over a lifetime. That provision ensures money doesn't go to waste if educational needs change.

Funds rolled over to a Roth IRA can be withdrawn free from federal taxes and Illinois income tax. If you are not an Illinois taxpayer, these withdrawals may include recapture of tax deduction and state income tax. Account Owners and Beneficiaries should consult with a qualified tax professional before rolling over funds from their 529 plan to contribute to a Roth IRA.

From an estate planning perspective, 529 contributions are considered completed gifts, so they can reduce your taxable estate while allowing you to maintain account control.

What Can You Use It For?

Many families assume 529 plans only cover tuition—but the list of qualified expenses is much broader. Funds can be used for:

• Tuition and mandatory fees
• Books, supplies, and required equipment
• Room and board (for students enrolled at least half-time)
• Computers and internet access
• Apprenticeship program costs
• Up to $10,000 toward student loan repayment

Withdrawals for registered apprenticeship programs and student loans can be withdrawn free from federal and Illinois income tax. If you are not an Illinois taxpayer, these withdrawals may include recapture of tax deduction, state income tax as well as penalties. You should talk to a qualified professional about how tax provisions affect your circumstances. Apprenticeship programs must be registered and certified with the Secretary of Labor under the National Apprenticeship Act. Student loan repayment subject to a lifetime limit of $10,000 per individual when using a 529 plan.

Non-qualified expenses—like travel, insurance, or extracurricular fees may trigger taxes and penalties. Still, the broad scope of qualified expenses makes a 529 account a versatile education savings vehicle.

529 Ownership, Financial Aid Impact & Strategic Considerations

Another common question: does it matter whether a parent or grandparent opens the 529 account? The answer is no, it does not.

Beginning with the 2024-25 academic year, the FAFSA no longer factors in grandparent-owned 529 savings accounts, meaning grandparent-owned 529 assets and distributions will not affect their grandchildren's financial aid eligibility.

529 Quick-Start Options for Late Savers

If you're feeling behind in saving for college, here are some practical catch-up strategies that can be used:

• Automatic Annual Increase – Elect to automatically increase your recurring contribution.
• Superfund contributions – Make a large, upfront deposit using the five-year gift rule.
• Lump-sum deposits – Allocate tax refunds, bonuses, or inheritance funds directly into the account.
• Savings Gifts – Instead of the usual gift items, ask friends and family to contribute to your loved one's Bright Start 529 account.
• Automatic contributions – Even modest recurring deposits can add up over time, and automation helps maintain discipline.

Every dollar invested has the potential to grow, and even a few years of saving can make a meaningful dent in future costs.