Which 529 Plan Should Texas Residents Use?
Texas has two 529 college savings plans, the Texas College Savings Plan and the Lonestar 529 Plan. The Texas College Savings Plan is a direct-sold 529 plan that can be opened online and the Lonestar 529 Plan is an advisor-sold 529 plan that is only available through a licensed financial advisor.
But, Texas residents are not limited to using an in-state 529 plan. Families should also consider out-of-state 529 plans that have lower fees and better investment performance.
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, data of birth and SSN or ITIN.
Families looking to enroll in the Lonestar 529 Plan should consult with a licensed financial advisor.
Tax-deferred investment growth
Texas’s direct-sold and advisor-sold 529 plans offer tax-deferred investment growth and tax-free withdrawals when the funds are used to pay for qualified education expenses, including:
- Tuition and fees at any eligible post-secondary education institution
- Books, supplies and equipment
- Room and board if the student is enrolled 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
Contributions to a 529 plan are considered completed gifts for tax purposes and up to $15,000 qualify for the annual gift tax exclusion ($30,000 if married filing jointly). Families may also choose to 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 $750,000 to 529 plans in 2019 without incurring gift taxes or using up any of their lifetime gift tax exemption.
$15,000 * 2 grandparents = $30,000
$30,000 * 5 years of contributions = $150,000
$150,000 * 5 grandchildren = $750,000
The grandparents, who are the 529 plan account owners, are able to remove $750,000 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 $370,000. The 529 plan account may continue to accrue earnings after the limit is reached, but no new contributions or rollover contributions may be made. If contributions are made to another state’s 529 plans 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
529 plans owned by a dependent student or one of their custodial parents are counted as parental assets on the Free Application for Federal Student Aid (FAFSA). A maximum of 5.64% of parent assets are considered available funds to pay for college, compared to 20% of student owned assets.
Funds held in a Texas 529 plan are not considered when determining a student’s eligibility for Texas state-funded student financial aid. Texas state-sponsored financial aid programs are only available to students who attend an in-state college or university.
Total asset-based expense ratios for the Texas College Savings plan range from 0.5897% to 0.9887%, depending on the type of investment chosen. The Lonestar 529 plan’s total asset-based expense ratios range from 0.6593% to 2.4793%, 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 $51 and $1,211. The 529 fee study does not include advisor-sold 529 plans.
Savingforcollege.com assigns a 5-Cap Rating to each 529 plan, based on performance, costs, features, reliability and whether or not the plan offers any special benefits for residents.
The Texas College Savings Plan and the Lonestar 529 Plan received the following ratings for residents as of June 30, 2019:
Overall 5-Cap Rating
Texas College Savings Plan
Lonestar 529 Plan
Source: Savingforcollege.com data as of 6/30/2019
A good place to start