John E. Chapman
Chief Executive Officer
As with most life decisions, a variety of factors must be carefully evaluated when determining the most effective strategy for accumulating savings for a minor’s benefit. Throughout the decision process, the main point of emphasis must be on which account accomplishes the underlying goal of the gift. Is the goal to accumulate savings for education expenses or is the goal to accumulate savings for the general expenses of a minor? When evaluating options to achieve your goal, two accounts to consider are the Illinois BrightStart 529 plan and the Uniform Transfers to Minors Act (UTMA) account. This article will review each account’s purpose while also exploring each’s key benefits.
This article is intended only for Illinois residents as 529 plans are governed by each state individually. Please reach out if you have any questions regarding a different state’s 529 plan.
The numerical list below provides an overview of the Illinois BrightStart 529 plan versus the Uniform Transfers to Minors Act (UMTA) account.
Primary Purpose
- Illinois BrightStart 529 – Saving for future education expenses.
- Illinois UTMA – Saving for general use for the benefit of the minor.
Tax Benefits
- Illinois BrightStart 529 – Illinois taxpayers who are married, or filing jointly, can reduce their state taxable income up to $20,000 per year. Illinois taxpayers who are filing individually may deduct up to $10,000 per year. Investment earnings are 100% free from federal and Illinois state taxes when used for qualified education expenses.
- Illinois UTMA—No state income tax deduction is available. Investment earnings are subject to the “kiddie tax” from $1,350 to $2,699 and the parents’ marginal tax rate for earnings above $2,700.
Account Ownership
- Illinois BrightStart 529 – The account is held in the name of the individual who established it.
- Illinois UTMA – The account is owned by the minor, with the custodian managing the account until the minor reaches the age of 21.
Control Over Funds
- Illinois BrightStart 529 – Custodian maintains control over the account.
- Illinois UTMA – Custodian manages the account until the minor reaches the age of majority, which is 21 in Illinois. When the child turns 21, the account will be updated from a custodial account to an individual account, meaning that the former custodian has no control over the funds.
Use of Funds
- Illinois BrightStart 529—Education expenses only. If the funds are not used for qualified higher education expenses, a federal 10% penalty tax on earnings (as well as federal and state income taxes) may apply.
- Illinois UTMA – Any purpose that benefits the minor.
Contribution Limits
- Illinois BrightStart 529 – For the tax year 2025, there’s no federal gift tax on contributions made up to $19,000 per year for a single filer, or $38,000 for a married couple. You can also accelerate your gifting with a lump sum gift of $95,000 for a single filer or $190,000 for a married couple and pro-rate the gift over five years per the federal gift tax exclusion.
- Illinois UTMA – For the tax year 2025, there’s no federal gift tax on contributions made up to $19,000 per year for a single filer, or $38,000 for a married couple. Any additional contribution beyond the tax year 2025 will require a federal gift tax return.
Both accounts are viable saving options, but we must revisit what the goal of the individual gifting the dollars is. If their primary goal is to save for education expenses, then an Illinois BrightStart plan may be the best account, while if the primary goal is general saving for a minor, a UTMA may be the best option. For more information on Illinois BrightStart 529 Plans or UTMA Accounts, please visit the links below.
Sources:
- www.brightstart.com
- www.dhs.state.il.us/page.aspx?item=15169
- www.dhs.state.il.us/page.aspx?item=15174
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