Comparison of Selected College Savings Vehicles

              Description Who Can
Invest?
Income
Limit
Maximum
Age Limit
How Can Funds
Be Used?
Where Can Funds
Be Used?
Maximum
Contribution
Limit
State Tax Deductibility
of Contributions
Federal Income Tax Treatment
of Earnings
Federal Income Tax
Treatment of Qualified
withdrawals
Annual Limit for
Gift Tax
Exclusion
Control
of Funds
Ability to Change
Beneficiaries
Choice of
Investment Options
Tax Treatment of
Non-Qualified Withdrawals
Bright Start® Section 529
College Savings Program
State sponsored,
tax-advantaged
education
savings vehicle
used for
qualified higher
education
expenses.
Anyone
(relative or
non-relative)
who is a U.S.
citizen or
resident alien.
None None Higher Education:
tuition, fees, room and
board, books and
required supplies and
equipment.
Any educational institution
eligible to receive Title IV
funds: colleges, universities,
graduate schools, commu-nity
colleges, vocational
and technical schools.
Includes some schools
located outside of U.S.*
$235,000 in
aggregate for
all accounts
for the same
beneficiary.
Yes. $10,000 for Illinois
individual taxpayer ($20,000
if filing jointly.)
Earnings grow free from federal
income taxes while in the account.
Qualified withdrawals are
free from federal income
taxes.
$60,000 ($120,000
for married
couples) per
beneficiary in a
single year, if elect
to treat as gift
spread over 5 years.
Account
owner
maintains
control.
Yes, to another
qualified member of
the current
beneficiary's family.
Professionally managed
portfolios. You may change
your investment option
once per calendar year, or
whenever you change your
beneficiary.
The earnings portion of a
non-qualified withdrawal is
subject to federal income
taxes and any applicable
state/local income taxes, as
well as an additional 10%
federal tax.
Uniform Trust/Gift
to Minors Act Account
(UTMA/UGMA)
Custodial account
managed for the
benefit of a
minor. The
account is an
irrevocable
transfer of assets
in a child's name.
Anyone
(relative or
non-relative)
who is a U.S.
citizen or
resident alien.
None Account
ownership
transfers to
the minor
upon reaching
age of
majority.
No restrictions, except
funds must be used for
the benefit of the minor.
At the age of majority
the child controls use of
funds (doesn't have to
be used for higher
education.)
No restrictions, except
funds must be used for the
benefit of the minor. At
the age of majority the
child controls use of funds
(doesn't have to be used
for higher education.)
Unlimited No If beneficiary is under 14:
· First $850 of unearned income is
free from federal income taxes.
· Next $850 is taxed at child’s rate.
· Unearned income above $1,700
are taxed at the parents’ marginal
rate.
If the beneficiary is 14 or older:
· First $850 of unearned income is
free from federal income taxes.
· Unearned income above $850 are
taxed at the child’s rate.
Not applicable. See "Federal
Income Tax Treatment of
Earnings".
$12,000 ($24,000
for married
couples) per
beneficiary in a
single year.
Custodian
controls
investments
until
beneficiary
reaches age
of majority.
Upon
reaching age
of majority,
ownership
transfers to
the minor.
No Unlimited No restrictions as long as
funds are being used for the
benefit of the minor. See
"Federal Income Tax Treatment
of Earnings".
Coverdell Education
Savings Account
Tax-advantaged
education savings
vehicle for
qualified K-12
and higher
education
expenses.
Anyone
(relative or
non-relative)
who is a U.S.
citizen or
resident alien.
Individuals
meeting the
modified
adjusted gross
income limit.1
Contributions:
beneficiary
must be under
age 18; unless
special-needs
beneficiary.
Distributions:
beneficiary
must use
account assets
by age 30;
unless
special-needs
beneficiary.
Higher Education:
tuition, fees, room and
board, books and
required supplies and
equipment.
K-12 Schools: also
includes uniforms,
transportation,
after-school programs,
and computer
equipment.
Any educational institution
that is eligible to receive
Title IV funds: colleges,
universities, graduate
schools, community
colleges, vocational and
technical schools. Includes
some schools located
outside of U.S.*
May also be used for
public, private or religious
school that provides
elementary or secondary
education (K-12).
$2,000 per
year in
aggregate for
all accounts
for the same
beneficiary.
Subject to
reduction
within an
income phase
out range.1
No Earnings grow free from federal
income taxes while in the account.
Qualified withdrawals are
free from federal income
taxes.
"Maximum
Contribution
Limit" is below
Annual Limit for
Gift Tax Exclusion.
Beneficiary's
parent or
guardian
maintains
control.
Depending
on terms of
account, con-trol
may be
transferred
when benefi-ciary
reaches
age of
majority.
Yes, but limited to
another member
under age 30 of the
current beneficiary's
family.
Unlimited, with the
exception of life insurance
contracts and "collectibles.
The earnings portion of a
non-qualified withdrawal is
subject to federal income
taxes and any applicable
state/local income taxes, as
well as an additional 10%
federal tax.
Roth Individual
Retirement Account
Tax-advantaged
retirement vehi-cle
that may also
be used to fund
qualified higher
education
expenses.
Anyone, or
their spouse
who is a U.S.
citizen or
resident alien
who has
earned income.
Individuals
meeting the
modified
adjusted gross
income limit.2
None If the account has been
held for five years and
the IRA holder is over
age 59 1/2, no
restrictions. For
premature withdrawals,
earnings portion is
subject to 10% penalty
unless used for higher
education of IRA holder,
spouse, child or
grandchild.
Any eligible educational
institution.
Maximum
limit is $4,000
($5,000 for
taxpayers age
50 and older)
per account.
Contribution
limits is
phased out
based on
modified
adjusted gross
income.
No Earnings grow free from federal
income taxes while in the account.
If the account has been held
for five years and the IRA
holder is over age 591/2,
distributions for education
expenses are tax-free and
penalty-free. For premature
withdrawals, earnings portion
taxed as ordinary income,
but penalty-free when used
for qualified higher education
expenses.
Not applicable Account
owner
maintains
control.
Yes. For premature
withdrawals, earnings
portion is subject to
10% penalty unless
used for higher
education of IRA
holder, spouse, child
or grandchild.
Unlimited, with the
exception of life insurance
contracts and "collectibles.
The earnings portion of
withdrawal is subject to federal
income taxes and any
applicable state/local income
taxes, as well as an additional
10% federal penalty.
Education Bond Program
(U.S. Savings Bonds)
Series EE ( issued
after 1989) and
Series I Savings
Bonds may be
used to fund
qualified higher
education
expenses.
Anyone over
age 24 by the
first day of the
month that the
bond was
purchased who
is a U.S. citizen.
No
restrictions
on purchase.
Federal
income tax
exemption
for interest
earned on
bonds is
limited to
individuals
meeting the
modified
adjusted gross
income limit.4
None Higher Education:
Tuition and fees only for
bondholder, spouse or
dependent.
Any educational institution
eligible to receive Title IV
funds: colleges, universities,
graduate schools,
community colleges,
vocational and technical
schools. Includes some
schools located outside of
U.S.*
Purchase
limitations are
set by the U.S.
Treasury.
Paper I Bonds:
$30,000 face
value per
year/person.
Paper EE
Bonds:
$60,000 face
value per
year/person.
(Similar limits
for electronic
I and EE
bonds)
No Federal taxes can be deferred until
redemption or maturity. Earnings
grow free from state/local income
taxes.
Based on income level, all or
part of the interest received
on redemption may be
tax-free if used for qualified
higher education expenses.4
Interest on U.S. savings bonds
are exempt from state and
local income taxes.
Not applicable Bondholder
controls the
investment.
Yes, but limited to
bondholder, spouse
or dependent.
Interest-earning bond
backed by the full faith and
credit of the U.S.
government.
No penalty. Interest on
redeemed bonds is included in
federal income, excluded from
state income.
Taxable
Account
Any taxable
account.
Anyone None None Any use No restrictions No limit No Dividends and interest are taxed to
the owner at ordinary income rates,
and capital gains are taxed at capital
gains rates.
Not applicable. See "Federal
Income Tax Treatment of
Earnings".
No gift involved Account
owner
maintains
control.
Not applicable Unlimited Not applicable. See "Federal
Income Tax Treatment of
Earnings".
Comparison of Selected College Savings Products (Based on 2006 limits)
Saving for college can be challenging when your family has other financial priorities such as planning for retirement and paying the
mortgage.That's why it's important to decide which college savings product best fits your unique financial situation.
Additional Bright Start Tax Considerations
Balance Limit
•The combined maximum account balance limit for the Bright Start College Savings Program and all other
Section 529 programs established and maintained by the State of Illinois for a particular beneficiary cannot
exceed $235,000. Although account balances can grow beyond that amount, no additional contributions can
be made once the balance reaches $235,000.
Illinois State Tax Deduction
•For each individual filer, up to a maximum of $10,000 in contributions ($20,000 if filing jointly) to the Program
in a tax year is deductible from state taxable income for that tax year including the contribution portion of
rollovers (but not the earnings portion of rollovers) from other Section 529 programs.
Federal Sunset Provision
•Please note that the federal tax exemption for qualified withdrawals is due to expire on December 31, 2010,
unless the law providing for the federal exemption is extended.
Non-Qualified Withdrawals
•The earnings portion of a non-qualified withdrawal is subject to federal income taxes and any applicable state
and local income taxes as well as an additional 10% federal tax.
Gift and Estate Taxes (based on 2006 limits)
•Contributions between $12,000 and $60,000 made in one year can be prorated over a five-year period with-out
incurring federal gift taxes or reducing your unified estate and gift tax credit. If the account owner dies before
the end of the five-year period, a prorated portion of the contribution will be included in his or her taxable
estate. If you contribute less than the $60,000 maximum, additional contributions can be made without incur-ring
federal gift taxes, up to a prorated level of $12,000 per year. Federal gift taxation may result if a contribu-tion
exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of con-tribution.
Other Important Considerations
The Comparison of Selected College Savings Products Chart (“the Chart”) has been prepared by Legg Mason to
give a general comparative overview of vehicles that may be used to save for college expenses. It was compiled from
sources and data Legg Mason believes to be reliable, but Legg Mason makes no representations as to its accuracy
and completeness. Legg Mason expressly disclaims any responsibility or liability for any losses or damages arising out
of use of the Chart.
*To see a list of eligible educational institutions, visit www.fafsa.ed.gov.
1 Coverdell ESA. Income limit phase-out for individual tax filers is $95,000-$110,000. For married taxpayers filing
jointly, the income limit phase-out is $190,000-$220,000.
2 Roth IRA. Income limit phase-out for individual tax filers is $95,000-$110,000. For married taxpayers filing jointly,
the income limit phase-out is $150,000-$160,000.
3 State tax treatment varies by state.
4 Education Bond Program. Income limit phase-out for individual tax filers is $63,100-$78,100. For married
taxpayers filing jointly, the income limit phase-out is $94,700-$124,700.
Consider the investment objectives, risks, fees and expenses of the Bright Start Program carefully before invest-ing.
The Program Disclosure Statement (PDS) contains more complete information about these and other fea-tures
associated with the Program.The PDS should be read carefully before investing. Ask your financial pro-fessional
for a copy of the PDS.
If you or your designated beneficiary is a resident of a state other than Illinois, you should check with your or
your designated beneficiary’s home state to see if it offers a Section 529 program.That program may offer
state tax or other benefits to residents of that state that may not be available to investors in programs of
other states.