Which 529 Plan Should Texas Residents Use?

October 27, 2023

Texas has two 529 college savings plans, the Texas College Savings Plan and the Lonestar 529 Plan. The Texas College Savings Plan allows individuals to open it online as a direct-sold 529 plan. In comparison, the Lonestar 529 Plan is exclusively accessible through a licensed financial advisor as an advisor-sold 529 plan.

Texas also offers a 529 prepaid tuition program called the Texas Tuition Promise Fund, a direct-sold plan.

But, Texas residents are not limited to in-state 529 savings plans. Families should also consider out-of-state 529 plans with lower fees and better investment performance. Here’s how to choose the best 529 plan for Texas residents looking to save for college costs.

How to enroll in a Texas 529 plan

Families can open the Texas College Savings Plan by clicking the ENROLL now button and completing an application online. The 529 plan account owner will be required to provide their name, Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), date of birth, mailing address, telephone number and email address, and the beneficiary’s name, date of birth and SSN or ITIN.

Families seeking to enroll in the Lonestar 529 Plan should consult a licensed financial advisor.

Tax-deferred investment growth

Texas’s direct-sold and advisor-sold 529 savings plans are tax-advantaged accounts for college savings. They offer tax-deferred investment growth. You can invest in Vanguard funds along with other options. Investors can choose from age-based portfolios and risk-based options.

These plans provide tax-free withdrawals when you use the funds to pay for qualified education expenses, such as:

Tuition and fees at any eligible post-secondary education institution
Books, supplies, and equipment
Room and board are eligible for coverage when the student enrolls on at least a half-time basis.
Up to $10,000 per year in K-12 tuition expenses

Many states offer a state income tax deduction or state income tax credit for 529 plan contributions. However, Texas does not have a personal income tax and, therefore, does not offer a state income tax benefit for 529 plan contributions.

Estate planning benefits

For tax purposes, the government considers contributions to a 529 plan as completed gifts, and they qualify up to $17,000 for the annual gift tax exclusion ($34,000 if filing jointly as married). Families may frontload or superfund a 529 plan with up to 5 years’ worth of contributions.

Affluent grandparents sometimes use this 5-year gift-tax averaging as an estate planning strategy. For example, a grandfather and grandmother with five grandchildren can contribute up to $850,000 to 529 plans in 2019 without incurring gift taxes or using up any of their lifetime gift tax exemption.

$17,000 * 2 grandparents = $34,000

$34,000 * 5 years of contributions = $170,000

$170,000 * 5 grandchildren = $850,000

The grandparents, who are the 529 plan account owners, can remove $850,000 from their taxable estate while retaining control of the assets in the 529 plan accounts.

Maximum contribution limits

Texas’s 529 plans accept contributions until all Texas 529 plans for a particular beneficiary reach $500,000. The 529 plan savings account may continue to accrue earnings after reaching the limit, but contributors may not make any new or rollover contributions. If contributions are made to another state’s plan for the same beneficiary, any amount above the Texas limit must be appropriate for the beneficiary’s future higher education needs.

Minimum contribution requirements

The Texas College Savings Plan and the Lonestar 529 Plan have minimum contribution requirements of $25 per portfolio or $15 per portfolio for account owners who set up the automatic investment plan.

Favorable financial aid treatment

The Free Application for Federal Student Aid (FAFSA) counts 529 plans owned by a dependent student or one of their custodial parents as parental assets. A maximum of 5.64% of parent assets are considered available funds to pay for college, compared to 20% of student-owned assets.

Texas does not consider funds in a 529 plan when determining a student’s eligibility for state-funded student financial aid. Texas state-sponsored financial aid programs are only available to students who attend an in-state college or university.

Fees

Both Texas 529 plans offer low-fee investment options. Total asset-based expense ratios for the Texas College Savings plan range from 0.31% to 0.52%, depending on the investment options chosen. The Lonestar 529 plan’s total asset-based expense ratios range from 0.59% to 1.44%, plus an additional sales charge, depending on the share class.

According to Savingforcollege.com’s most recent 529 fee study, the 10-year total asset-based fees on a $10,000 investment in the Texas College Savings Plan would be between $418 and $653. The 529 fee study does not include advisor-sold 529 plans.

Performance

Savingforcollege.com assigns a 5-Cap Rating to each 529 plan based on performance, costs, features, reliability, and whether the plan offers unique resident benefits.

The Texas College Savings Plan and the Lonestar 529 Plan received the following ratings for residents as of October 27, 2023: