Named for Section 529 of the Internal Revenue Code, a 529 plan is a good way for parents, grandparents and interested parties to save for a child’s education. Such plans, formally known as qualified tuition plans, are sponsored by states and related agencies. Earnings in a 529 plan are not subject to federal or state taxes if used for the beneficiary’s qualified education expenses.
Some states offer special tax benefits for residents investing in a 529 plan, such as state income tax deductions, but that is not the case in Texas. The Lone Star State offers two types of 529 plans, a prepaid and savings plan. Just because you live in Texas, or any other state, however, does not mean you are limited to investing only in that state’s 529 plans.
TL;DR (Too Long; Didn't Read)
Unlike with other states, you don't get special tax advantages when you put money in Texas 529 plans.
Prepaid 529 Plans
The Texas Tuition Promise Fund allows state residents to lock in tomorrow’s education at Texas public colleges and universities at today’s rates. If your child decides not to attend a Texas public institution of higher education, he or she may still use their TTPF savings at private colleges or those located out of the state. While rates aren’t locked in at private or out-of-state schools, it is possible to transfer the value of the 529 plan funds toward paying tuition and certain fees.
What if your child decides not to go to college, or receives a full scholarship to their dream school? The TTPF allows changing the beneficiary to another member of the beneficiary’s family. Contributors may also request a refund.
College Savings Plans
Monies in the Texas College Savings Plan may go toward paying for tuition, room and board, fees and textbooks. Anyone can invest in this plan, no matter their state of residency or income level, as long as they possess a valid U.S. address. The funds may be used at any accredited public or private higher education institution in the U.S. or abroad. U.S. residency is required for beneficiaries.
The Lonestar 529 Plan
Another option, the Lonestar 529 plan, is sponsored by the state of Texas but sold only through investment professionals. For that reason, expect higher fees for this plan. Under current regulations, the maximum sales charge for this plan is 5.75 percent.
The beneficiary can use the Lonestar 529 plan at any accredited public or private secondary educational institution in the country or abroad, including vocational and graduate schools. Along with tuition, fees and textbooks, the Lonestar 529 plan may be used towards room and board as long as the student is enrolled a minimum of half-time.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.