skip to content
Close

IMPORTANT NOTICE: The Texas College Savings Plan is established and maintained by the Texas Prepaid Higher Education Tuition Board. The Texas Sunset Advisory Commission performs periodic reviews of most state agencies. The Commission is currently reviewing the mission and performance of the Board. For information on how to provide comments or suggestions to Sunset staff on the Board’s mission, operations or services, please click here.


Investing Basics


Is a 529 plan your first time investing? If so, it will be helpful for you to understand some investing basics so you’re better informed when it comes time to make important investment decisions. We invite you to read more about:

Balancing Risks & Rewards

Everyone wants to earn a profit on their investments. But achieving a higher rate of return often means taking on more risk.

Of the three primary asset classes—money market, fixed income and equities—money market funds pose the least risk. In comparison, fixed income is considered a moderate risk, and equities carry the greatest risk for investors. Not surprisingly, money market investments generally offer the least amount of profit and equities have the potential for the greatest return.

So, how does one balance risk and reward? In order to determine your comfort level on the risk/return spectrum you have to ask yourself some additional questions. What is your time horizon? What tradeoffs are you willing to make to try to maximize returns? What is your investment priority: increasing returns, reducing risk or a combination of both?

Allocating Your Assets

There is no way to predict how well the markets or particular investment options will perform over time.

Diversifying your assets, or spreading them around to different investments, stocks, bonds and money markets, is a useful strategy as it allows you to greatly reduce your portfolio’s exposure to any one type of asset class.

Overall, a diversified portfolio is less risky because even if some of your holdings go down, others may go up.

In 529 plans, many invest in age-based portfolios to start out with an “aggressive” portfolio (with more equity funds) and later shift toward “conservative” investments like fixed income funds, which seek income and principal protection as the beneficiary nears college age.

Investment Strategies

Understanding Different Investment Strategies

Index Strategy

Generally, this strategy is designed to generate returns that attempt to track the performance of a major market index over the long term. Transaction costs and other expenses are lower because most of the investments are based on the composition of the index.

Blended Strategy

The blended strategy offers a combination of actively managed and index investments in one portfolio.

Types of Investments

The Texas College Savings Plan® vs. Other Education Savings Options
Features Texas College Savings Plan Coverdell Education
Savings Account
UGMA/UTMA Account
Beneficiary Age Limit None Can contribute until child reaches age 18. Must spend assets by child’s 30th birthday 18 or 21, depending on state law
Account Owner Income Limit None Phases out for incomes between $95,000 and $110,000 if single, $190,000 and $220,000 if married None
Federal Tax Treatment and Exemptions

Earnings grow tax free if account is used for qualified educational expenses

Qualified withdrawals are tax exempt

Earnings portion of non-qualified withdrawals are subject to ordinary federal income tax and any applicable state income tax, and an additional 10% federal tax penalty (limitation applies to all 529 plans)

Any earnings grow tax free if account is used for qualified educational expenses

Qualified withdrawals are tax exempt

Earnings portion of non-qualified withdrawals are subject to ordinary federal income tax and any applicable state income tax, and an additional 10% federal tax penalty

Any earnings and gains taxed to minor

Federal tax-free earnings growth is limited and adjusted annually.

Additionally, depending on the age of the beneficiary, any earnings in excess of current UGMA/UTMA federal tax-free amount will be taxed at student’s rate and/or parent’s rate.4

No federal tax penalties for non-qualified withdrawals

Contribution Limit $500,000 per child1 $2,000 per beneficiary annually None
Account Control Account owner Parent/account owner Child assumes control at legal age of majority
Beneficiary Flexibility Flexible beneficiary designation2 Flexible beneficiary designation2 May not be transferred
Financial Aid Impact Considered account owner’s assets Considered account owner’s assets Considered student’s assets
Asset Use Can be used for a broad range of qualified higher expenses including K-12 tuition expenses Can be applied to elementary, secondary and higher education expenses Unrestricted, provided it is for the benefit of the minor
Gift Tax Treatment Qualifies for up to $15,000 ($30,000 for married couples) per child, or a combined five-year gift of up to $75,000 ($150,000 for married couples) in 2018 Qualifies for up to $2,000 gift tax exclusion2 Qualifies for up to $15,000 ($30,000 for married couples) per child, or a combined five-year gift of up to $75,000 ($150,000 for married couples) in 2018
Estate Tax Treatment Considered removed from donor’s estate (partial inclusion if donor dies during the five-year election period) Considered removed from donor’s estate Considered removed from donor’s estate
Investment Flexibility Yes3 Yes Yes

1. The maximum contribution limit is currently $500,000 per Designated Beneficiary aggregated across all accounts in Texas sponsored 529 plans and cannot exceed this limit. Accounts that have reached the limit may continue to accrue earnings, but additional contributions including those from Rollovers are prohibited. See the Plan Description and Savings Trust Agreement for details.

2. Changes in beneficiary are limited to qualified family members of the current beneficiary without adverse federal tax consequences.

3. Account Owner may only change how previous contributions and any earnings thereon are invested twice per calendar year or upon a change in beneficiary.

4.Please consult your financial advisor or tax professional for details regarding your specific tax situation.