This step-by-step guide to enrolling in Texas’s 529 college savings plans makes it easier for Texas parents and grandparents to open a 529 plan.
1. Choose a 529 Plan
Texas has two 529 plans, the Texas College Savings Plan (direct-sold) and the Lonestar 529 Plan (advisor-sold). Families can invest in any state’s 529 plan, not just Texas’s 529 plans, so they may wish to shop around for 529 plans with the lowest fees and best performance.
The Texas 529 plans have among the lowest fees of all direct-sold 529 plans.
However, there are no state income tax breaks on contributions to the Texas 529 plan, since Texas does not have a personal state income tax.
2. Determine the Type of 529 Plan Account
There are two main types of 529 plan accounts: individual accounts and custodial accounts.
Most families will open an individual account with a parent as the account owner and a child as the beneficiary. Everybody can contribute to a parent-owned 529 plan account, including parents, grandparents, aunts, uncles and other relatives.
Typically, only one parent can be the account owner. If the child’s parents are divorced, it is best for the parent with whom the child lives the most – the parent who will be responsible for filing the Free Application for Federal Student Aid (FAFSA) – to be the account owner. If this parent has remarried, it is best for the account owner to be the child’s biological parent, not the stepparent.
If money from a custodial bank or brokerage account, such as an UTMA or UGMA account, is used to fund a 529 plan, then the 529 plan should be set up as a custodial 529 plan. With a custodial 529 plan account, the child is both the account owner and the beneficiary. Since the child is a minor, a custodian will manage the account on behalf of the child until the child reaches the age of majority. Note that the beneficiary of a custodial 529 plan account cannot be changed.
529 plans that are owned by a dependent student or the student’s parent are treated more favorably by financial aid formulas.
3. Complete the 529 Plan Application
To open a 529 plan account, visit the 529 plan’s web site to get a PDF account application or to apply online. Printed account applications can be submitted by mail.
Most 529 plan account applications will require the following information:
- Name of the account owner
- Name of the beneficiary
- Personal information about the account owner and beneficiary, including their mailing address, telephone number, email address, date of birth and Social Security Numbers (SSN) or Individual Taxpayer Identification Numbers (ITIN).
The 529 plan account application may also ask for the name and personal information of a successor account owner, in case the original account owner dies.
The 529 plan account application may also ask you to pick an initial set of investment portfolios.
If the application form is confusing, call the 529 plan’s toll-free number to ask questions. The toll-free number for the Texas 529 plans is 1-800-445-4723. You can also ask questions by sending email to the plan, but do not include account numbers, passwords or other personal information in the email message. You should look at the FAQ on the plan’s web site, since this provides answers to the most common questions.
4. Fund the 529 Plan
There are several ways of depositing money into a 529 plan. These include mailing a paper check to the 529 plan and transferring the money electronically from your bank account.
All 529 plans allow you to set up automatic contributions from your bank account. You will need to specify the contribution amount and the contribution frequency (e.g., biweekly, monthly, quarterly, annually). The 529 plan will also need the bank routing number and account number for your account and a voided copy of a preprinted check or preprinted deposit slip.
Some 529 plans, including the Texas 529 plan, can set up automatic contributions through payroll deduction from participating employers.
Other options include a rollover from another 529 plan, money from a Coverdell education savings account or money from the redemption of a qualified U.S. Savings Bond.
The minimum initial deposit is $25. Subsequent contributions, including automatic contributions, must be at least $25. The minimum payroll deduction amount is $15 per pay period.
There are no annual contribution limits for a 529 plan, but you can give up to $15,000 ($30,000 as a couple) each year without incurring gift taxes or using up part of your lifetime gift tax exclusion. 529 plans provide 5-year gift tax averaging, so you can give up to 5 times as much money ($75,000 or $150,000 as a couple) in a single year and have it treated as though it were given over a 5-year period.
Texas 529 plans have a cumulative contribution limit of $370,000. After a 529 plan account reaches this balance, it can still earn interest and appreciate in value, but no additional contributions will be accepted. Most people do not reach this limit.
Many people start off with a small, automatic monthly contribution and increase the amount after a few months. If your goal is to save about a third of the future cost of a public college education, start saving $250 per month from birth. If you can’t handle that big a contribution, start off with what you can afford.
5. Choose Investments for the 529 Plan
After the 529 plan has been opened and some funds have been deposited into the 529 plan, it’s time to choose investments for the 529 plan. The number of investment options is limited, making it easier to choose.
Most people invest in an age-based portfolio, which starts off with an aggressive mix of investments (e.g., mostly stocks) and gradually shifts to a less risky mix of investments as the child approaches college age.
The Texas College Savings Plan has two age-based portfolios. One invests in actively managed funds and one invests in passive index funds.
The Texas College Savings Plan also offers seven static portfolios, including two single-fund portfolios, four multi-fund portfolios, and a money market portfolio. The single-fund portfolios include an inflation-protected bond fund, a fixed-income fund and a money market portfolio.
You can change your investment strategy twice a year.