Texas 529 Plan Basics

While we are providing general information about the state’s 529 plan, please consult the Plan Description and Participation Agreement for more detailed information and facts about the plan.

A 529 plan is a savings plan, with tax benefits, that encourages education savings for qualified higher education expenses in any higher education tuition program. And the plan isn’t just for college and universities.

You can use 529 plan Texas funds can be used to cover tuition and required fees at prep schools or any eligible educational institution for K-12.

Unlike a traditional savings account or bank account, your money grows tax-deferred in a 529 account and qualified distributions are federal tax and state tax free.

Different states have different state plans with different investment options and different benefits. You can enroll in any state’s 529 plan that is open to enrollment from out-of-state. You are not limited to the beneficiary’s home state.

529 plan funds can be applied to in-state schools or out of state schools, public or private institutions. Additionally, 529 plans can be linked to the Upromise rewards service. Earn an extra $25 bonus when you connect a 529 account to your Upromise profile.

In Texas, there are three different plans to choose from: the Texas College Savings Program, LoneStar 529 Program, and the Texas Tuition Promise Fund.

The Texas College Savings Program is a direct sold plan with fees ranging from 0.59% – 0.94%. Enrollment does not require Texas state residency. Funds in this Texas college savings plan can go to higher education expenses at colleges and universities in any state.

The LoneStar 529 Plan is an advisor sold plan with fees ranging from 0.67% – 2.5%. Enrollment is available to any state resident, and funds in this plan can go to college tuition and expenses at out-of-state schools. With actively managed funds, this Texas savings plan does come with higher fees. You also get the guidance and investment advice of financial advisors.

The Texas Tuition Promise Fund is a prepaid tuition plan that is open to any U.S. resident. These funds must go towards enrollment in Texas public colleges and universities like The University of Texas at Austin, Southern Methodist, or Texas A&M.

The Texas Tuition Promise Fund lets you prepay for your child’s future education. At today’s tuition costs, you’re paying for your child’s college education down the road. You’re locking in tuition and credit costs at today’s rates regardless of what tomorrow’s college tuition costs will be. For families who know that their child be attending school in-state, the Texas prepaid tuition plan could be a good option.

All of these Texas college savings plans have a minimum contribution of $25 and a maximum contribution amount of $370,000.

What are some Texas 529 plan benefits and tax advantages?

Funds you invest in a 529 plan grow tax-deferred. And when your child eventually does take out funds down the road, these are tax free withdrawals — as long as the funds go towards qualified educational costs. This can include tuition, schools fees for general and educational purposes, books, room and board (including off-campus living).

A common misconception is that these 529 plan assets will disqualify your child from financial aid. On the contrary, 529 plan funds are treated more favorably in the financial aid formula than other savings in your child’s name through a custodial account such as an UTMA/UGMA. This is because assets in a child’s 529 plan belong to the parent not child, and FAFSA (Free Application for Federal Student Aid) gives preferential tax treatment to assets belonging to a student’s parent versus the student.

If your child is an Einstein or football star, and manages to score a free ride to school, you can still repurpose unused funds in your Texas college savings plan. You can take out an amount equal to the amount of scholarship funds from your 529 plan without incurring the 10% penalty tax fee you’d normally have to pay. (You would have to pay regular ordinary income taxes on earnings, but there would be no penalty. Alternatively, you can leave the funds in a 529 plan to be used at a later date by this beneficiary or a direct relative of the original beneficiary.)

And for many, a 529 plan can be used to transfer wealth. Contributing to a 529 plan lets grandparents or other contributors reduce the size of their taxable estate while helping them fund a grandchild’s or family member’s education. It’s even possible to make five years worth of contributions in a single year, up to $75,000 (or $150,000 for married couples) and still get the gift tax exclusion.

For questions about incurring gift taxes or federal tax laws, you’ll want to consul t the services of a qualified tax professional.

Is a 529 plan tax deductible in the state of Texas?

No, Texas does not offer tax deductions for 529 plans. While contributions are not tax-deferred when they are put into the plan, there is tax benefit when they are withdrawn later on down the road by the student.

What happens to a Texas 529 Plan if not used?

There is no time in which the funds within a Texas 529 plan need to be withdrawn. Unused funds can remain in the account and continue to grow tax-deferred.The account owner may also choose to change the beneficiary, without penalty, to an individual who is a member of the original beneficiary’s family and a U.S. citizen. This is not limited to immediate family members; funds can be transferred to cousins, nieces, nephews, and other close relatives. The account owner can close the account if not used, but funds in the account will be subject to federal and state income tax as well as a 10% penalty on the account earnings.

And as outlined earlier in this article, 529 plans allow the account owner to withdraw the amount a beneficiary receives in scholarships without incurring the 10% penalty.

Can a Texas 529 Plan lose money?

Yes, a 529 plan is an investment plan with different types of investment options. The investment options offer different levels of market risk. Speak with a qualified financial advisor about different investment portfolio options.

Texas, like many other states, does not offer an FDIC insured 529 college savings plan. Mutual funds, stocks, and bonds are similarly not FDIC insured.

Do I need a Texas 529 Plan for every child?

You don’t need a Texas 529 plan for each child but you may find it easier to administer if you do. You can only have one named beneficiary on a Texas 529 plan. The risk and mix of equities to fixed income of certain investment options is determined by the age of the beneficiary. For this reason, you may want to have a different 529 plan for each child.

You may be interested to know that multiple people can open accounts for the same beneficiary.

Can a Texas 529 plan be used to pay off student loans, apprenticeships, and K-12 private schools?

Texas 529 plans can be used to pay tuition at K-12 private schools and to pay student loans up to $10,000 annually. 529 plans can also be used to pay for registered apprenticeship programs.

How do financial aid and scholarships affect a Texas 529 plan?

A 529 plan can affect financial aid, but the impact is dependent on the account owner and their tax situation, not the beneficiary.

If the account is held by the parent or guardian of the student, funds within are considered parental assets. The Expected Family Contribution (EFC) calculation for parent assets is a maximum of only 5.64% versus 20% for the students assets.However, if the 529 plan is held by a grandparent or extended family member, while the assets are not taken into account for the FAFSA EFC, distributions from these accounts qualify as student income, which is assessed at 50%.

529 accounts do not affect merit-based scholarships. Other scholarships may depend based on the school.

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