Texans’ Options with 529 Education Savings Plans
January 27, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
Many states provide an incentive for their residents to use their state’s 529 plan through use of a state income tax deduction. Because Texas doesn’t have a state income tax, your options are really completely open in terms of what state’s 529 savings plan you use. You can go shopping for the best options and lowest costs for your particular situation. You can also use any state’s plan regardless of where your child plans to attend school.
Understanding the pros and cons of 529 plans
529 plans represent a solid savings opportunity because of the opportunity for the money to grow tax-free over an extended time horizon. Funds are deposited after tax. Principal and earnings may be withdrawn for qualified educational expenses tax-free. The more time you have, the more beneficial the tax-free growth is. But even within a year or two of starting college, 529 plans can be helpful.
There are also drawbacks to 529 plans. You lose flexibility in how you use the funds — if you withdraw funds for non-qualified expenses, you will be subject to income taxes and a 10% penalty on the portion representing earnings. 529 plans also carry increased investment expenses and have fixed investment options.
Selecting the Right Plan for you
In determining which plan is right for you, there are some factors that matter to everyone and some unique to your situation. Everyone’s consideration should include review of:
- quality of investment options offered in the plan
- costs of the plan — both administrative fees and investing costs (these vary widely from state to state)
- ease of access in opening your account, recurring deposits, withdrawals, investment changes, and reviewing statements
Most states also offer a direct plan option and an advisor option. The direct option allows you to open an account directly with the state’s plan without paying any investment sales commissions. The advisor option generally results in you paying investment sales commissions up to 5.75% on all deposits into your 529 plan. These commissions can require you to save a lot more to reach your savings goals. You can still use the direct plans and receive advice from an advisor on college planning and investing even by working with a fee-only advisor.
Other factors that may be relevant to your particular situation:
- Specific plan rules around which relatives can be named as a beneficiary in the event you want to transfer your 529 account balance to a different beneficiary.
- Contribution maximums
- Time limits for using your 529 account balances
- Investment options that match your particular needs:
- for a child close to college a guaranteed principal plus interest option is a must
- for someone who doesn’t want to monitor and adjustment their investments on an ongoing basis, a target-date investment program may be attractive that gets more conservative as the child get closer to college (although you need to exercise caution in selecting these)
One of my favorite sites for comparing different option 529 savings plan options is www.savingforcollege.com. Providing recommendations on how much you need to contribute, how your contributions should be invested, and which plan offers the best balance of low fees, features, and investment options for your situation is also one of the services that Keener Financial Planning provides.
Texas Tomorrow Fund Deadline Rapidly Approaching
October 21, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
For participants in the Texas Guaranteed Tuition Plan (also known as the Texas Tomorrow Fund) an important refund deadline is approaching. Any refund requests received before November 30 will be processed according to the current rules. The current rules allow for a refund of the original contribution plus earnings based on the rate of tuition inflation for a child who is age 18 or older. For those under 18, an actuarial value is calculated based on the date you bought the contract, the number of years until your child graduates from high school or turns age 18, and the number of payments made compared to the total number of payments required. After November 30, the new rules allow for only a return of the contributions, less expenses. Big Difference!
If you bought into the Texas Tomorrow Fund and your child plans to attend an accredited school in Texas, this change likely doesn’t affect you. You still have their tuition costs locked in and you have a terrific guarantee that no matter how high tuition goes, the plan credits you purchased will cover the costs. So you really wouldn’t want a refund.
However, if your child plans to attend school out of state or not attend college at all, you may wish to consider taking action now. In this case, you have several options.
You can request a refund from the plan and do a roll-over to another 529 plan. This would be a good option if your child plans to attend college out of state and you want access to control the investments prior to your child’s college enrollment. If you complete the roll-over within 60 days, you will not be subject to any taxes or penalties.
If you decide to do a roll-over, here are a couple of pointers: You are not required to use the state’s 529 plan where your child plans to attend school. Texas has no state income tax, so there’s really no incentive for using the Texas plan over any other plan. You are truly free to comparison shop and use any state’s plan that offers the best options for you. www.SavingforCollege.com is a good resource to start your search.
Another option is to simply take a withdraw. This may be the best option if your child does not plan to attend college and you have no eligible alternate beneficiary you wish to change to. If you go with this option, you will be subject to income taxes and a 10% penalty on the gains (gains are any amounts refunded in excess of what you contributed).
The Texas Guaranteed Tuition Plan website has a lot of really good information about this change and options available to you. You can log in and see your estimated account value to aid in your decision.
The important thing is to review the refund option based on your specific situation, calculate all of your options in advance of the deadline, and make a decision most beneficial to your family. There’s not one right answer for everyone.