It’s no secret that Texans are extremely proud of the Lone Star state, and with so many great things coming out of Texas it is easy to see why! However, this affinity for all things Texas can cause some to automatically assume the Texas College Savings Plan is the best, most appropriate plan for them. But is it really the best plan for your specific case? In this article, we will take a look at the specifics of Texas’ offerings and highlight what you need to know about tax deductions, fees, usability, and other considerations.
THE VERDICT: Residents of Texas should consider out-of-state options. With no state income tax, there really is no major incentive for residents to use Texas’ 529 plan. This gives Texas residents the freedom to look across the country for the 529 Plan with the best investment options and lowest fees. Tell us more about you and CollegeBacker will give you a free recommendation.
WHAT YOU NEED TO KNOW:
- Our Focus: This article focuses on the Texas College Savings Plan, with some mention of the Texas Tuition Promise Fund.
- Fees: With expense ratios ranging from 0.58-0.98%, the TCSP is more expensive than best-in-class 529s.
- Taxes: There is no special tax treatment for using Texas’ in-state plan. Since Texas is one of the seven states with no state income tax, there is no deduction offered for contributions.
- Usability: Basic. You can accomplish most tasks online (e.g., opening an account, making a contribution, changing investment options, changing beneficiary) via My Account, but you have to use physical paperwork to send/receive gifts, request rollovers, etc.
- Financial Aid: No special treatment for the in-state plan. The assets within a Texas College Savings Plan are treated as assets of the parents when determining expected family contribution.
OUR DETAILED REVIEW:
1) Our Focus
Today, we are going to focus on the Texas College Savings Plan, also known as TCSP. This is a 529 College Savings Plan, which is a tax-advantaged investment account designed to help your family save for college.
Texas offers another plan called the Texas Tuition Promise Fund. This plan works a bit differently. In short, you pay today’s tuition prices with a “promise” it will pay for future tuition. Texas shut down its previous prepaid plan, called the Texas Tomorrow Fund, which constitutionally guaranteed payment. Instead they replaced the plan with the Tuition Promise Plan, which requires colleges to accept the credits, but is not constitutionally guaranteed. Before investing here, it is important to fully understand the risks involved with these guarantees.
When selecting a long-term financial product, such as a 529 College Savings Plan, it is incredibly important to be mindful of fees. Even seemingly small fees will add up over time.
Typically, 529 plans will charge a fee based on “AUM”, or Assets Under Management. This means your fee is a set percentage of the total assets that the plan controls for you and the amount you are charged depends on the total amount you have saved. When the investments increase with time, so will the fee.
With the TCSP, this fee percentage is 0.58% - 0.98% of your saved assets each year. (Your fee depends on the investment portfolio you choose.) In contrast, best-in-class 529 plans typically charge ~0.20%.
Let’s put this in context for you. Let’s assume you are saving $1,000 this year for your child’s education expenses, and you’re going to keep those dollars within the plan for 18 years. In that first year, you would be paying $5.80 to $9.80. Over the next 18 years, the money you have contributed is expected to grow (which would also cause your fee to grow) – but to keep things simple, we will assume your investment of $1,000 remains constant each year. This would have you paying $106.15 to $177.97 in fees annually. If your contributions grew above that $1,000, then the fees would increase even further.
Now let’s take a look at the best-in-class 529 plan and use the same assumptions. If you save the same $1,000 in the lower-fee plan for the same 18 years, the fees you are paying are quite different. In that first year, you would be paying about $2.00. In 18 years of saving that same $1,000 annually, your fee will be just $36.00, which saves you $70.15 to $141.97. Again, if you save more than $1,000 or if your investments appreciate, then the fee savings differential will increase too.
While $2 versus $6 per year might seem like an inconsequential amount, keep in mind that this fee is paid each and every year, so this adds up over time!
Taxes are the main reason you want to save within a 529 College Savings Plan. The advantages given to all 529 plans are specifically designed to help parents save for education expenses. You can contribute post-tax dollars into the plan, and then the growth on those investments is entirely tax-free. When it comes time to withdrawal the money for college expenses, the withdrawals are also tax-free.
Some states offer additional tax deductions on your state income tax for your contributions. However, Texans are lucky enough to not have a state income tax at all! The Federal benefits are offered no matter what 529 Savings Plan you choose. So in other words, there is no specific tax advantage for choosing TCSP over other plans. Choose any 529 plan you like!
All things considered, the Texas College Savings Plan has fairly basic usability. While it generally accomplishes what it needs to, you may have some difficulty if you’re looking to get others involved in the saving, want to see a comprehensive summary of your investment portfolio options, or if you need to perform a rollover and other more advanced actions.
Similar to other 529 College Savings Plans, the TCSP’s website will allow you to perform basic account activities online, such as enrolling and opening your account, contributing to the account, setting up recurring contributions or automatic payroll deductions, making withdrawals, or updating some basic account information like account owner and beneficiary.
If you are looking to get others involved and want to set up contributions from family and friends, you can go to gift.coupon for a form provided by North Star Financial. Unfortunately, this requires printing and mailing your information, as well as including a paper check. Other advanced functions, such as requesting a rollover into a different 529 College Savings Plan, will require submitting a paper form as well.
By using CollegeBacker, you can much more easily send and receive gifts from family and friends and stay connected with them over time.
5) Financial Aid
Savings in a Texas 529 Plan, as long as the account is registered as owned by the parent, are considered parental assets on the FAFSA, which is favorable compared to being considered assets of the student. This is because the 529 has a much lesser effect on the student’s Expected Family Contribution, or EFC. The EFC is subtracted from the college’s published cost of attendance to determine a student’s aid eligibility. It is important to keep your EFC number as low as possible. Assets that are deemed parental assets will only increase your EFC by 5.64%, as opposed to 20% for student-owned assets.
Let’s contextualize this with a concrete example. If Anna’s parents have $25,000 saved up in a 529 plan, then the 529 only increases Anna’s EFC by $1,410. It is reasonable to expect that the tax-free investment gains offered by the plan will outweigh this loss of aid. However, if this $25,000 was saved in an UGMA/UTMA and was considered a student-owned asset, then Anna’s EFC would increase by $5,000, which is a much steeper amount to justify.
Need help choosing the right 529? Visit CollegeBacker.com
For more information, visit the Texas College Savings Plan website.