Does the Texas 529 Plan Offer Special Tax Advantages to Its Residents?

A 529 plan is a savings plan that allows you to invest money to cover future college costs for a family member or other beneficiary. As of publication, Texas has four 529 plans, including two prepaid tuition plans and two college savings plans. A prepaid tuition plan allows for you to purchase units or credits for future tuition and fees at participating schools. You are charged the existing rates at the time you open your account. A college savings plan enables you to establish a special investment account intended for college costs. Texas's plans offer no special tax advantages to Texas residents that aren't available to others.

State Tax Deduction

According to the FinAid website, a guide to financial aid, each state in the U.S. sponsors at least one 529 plan. Most of the states use special tax incentives to encourage their residents to contribute to 529 plans. In fact, 34 states and the District of Columbia give residents some form of state income tax deduction on the contributions that they make to a state 529 plan. However, Texas is one of the states that does not offer this deduction, because it is one of seven states that does not have an income tax, so there is no need or mechanism for a state tax deduction.

Federal Tax Benefits

The central advantage of both prepaid tuition plans and college savings plans in Texas and other states is that earnings in the accounts grow free of federal taxes. In both types of 529 plans, participants' money is invested in an investment fund designed to achieve growth over the subsequent years. Participants can then withdraw funds for qualifying educational expenses without paying federal income taxes on the funds. If the funds are used for non-qualifying expenses, federal taxes and a 10-percent tax penalty do apply.

College Savings Plans

Texas offers two college savings plans that are managed by OFI Private Investments, a subsidiary of Oppenheimer Funds. They are the LoneStar 529 Plan and the Texas College Savings Plan. Neither plan offers any tax advantages to state residents that are not available to all participants. Because the plans are college savings plans, they offer the standard federal benefits that those plans carry, including tax-free earnings and no taxes due upon withdrawal of funds for qualifying college expenses. Both plans are available to all U.S. residents.

Prepaid Tuition Plans

The Texas Guaranteed Tuition Plan and the Texas Tuition Promise Fund are prepaid tuition plans that allow participants to lock in tuition and required fee rates at Texas public and private colleges and universities. The plans do not provide any tax advantages reserved for Texas residents; however, the plans uniquely benefit state residents because they are only available to them. Both plans require that either the beneficiary or the account owner be a Texas resident. Texas guarantees the investments in prepaid tuition plans but not in the college savings plans available to non-Texas residents.


About the Author

Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.