The tax advantages of opening an account in the Texas College Savings Plan are available to any U.S. citizen or permanent resident alien 18 years of age or older with a valid social security number, regardless of income level, tax bracket or financial situation.
Because earnings in 529 plans are not subject to federal tax and generally not subject to state tax when used for qualified higher education expenses, it can help your account grow. As the chart below shows, the tax advantages of a 529 plan could mean the difference between fully funding a higher education and coming up short.
This hypothetical illustration assumes an initial investment of $10,000 and a 5% annual rate of return. The taxable account assumes a 28% federal tax rate. The illustration does not represent the performance of any specific account or investment and does not reflect any plan fees or sales charges that may apply. If such fees or sales charges had been taken into account, returns would have been lower.
You can withdraw funds in a 529 plan account to pay for qualified higher education expenses without incurring federal taxes. If the money is used for other non-qualified expenses, the earnings portion of the withdrawal is subject to ordinary federal tax and any applicable state taxes plus an additional 10% federal tax penalty unless you qualify for an exception to the penalty.
Gift Tax and Estate Tax Benefits
Gifts to 529 plans are partially exempt from the federal gift tax. For 2018, you can contribute up to $15,000 annually ($30,000 for married couples) per beneficiary, or up to $75,000 over a five-year period ($150,000 for married couples) per beneficiary, without triggering the gift tax.1
Keep in mind that your gifts are excluded from your estate, so investing in a 529 plan can be a smart strategy to reduce your estate tax while helping to prepare your loved one for college.
1If the account owner utilizes the special five-year lump sum exclusion and dies within five years of the funding date, the portion of the contribution allocable to the years remaining in the five-year period (beginning with the year after the account owner’s death) would be included in the account owner’s estate for federal estate tax purposes. Consult with your tax advisor for more information.