Should you use the Texas College Savings Plan?

Chris Reddick |

What is a 529 Plan?

I often get the question of whether to use the Texas College Savings Plan. So, a 529 college savings plan is like a special savings account set up to help families save up for someone's education, usually for college. This is the 529 college savings plan where you can go online and enroll in an account to save for college for your children.

All states have college savings plans. Most of the college savings plans have improved, and provide low cost index funds. But here's the thing, they're not like your typical investment accounts. The deal with 529 savings plans is that they offer a specific set of age-based and static portfolios. So, your investment choices are limited, and you can only make changes to them twice a year.

Investment Options

Age-based are simple in that they target your child's enrollment in college. So, the investments get more conservative as your child approaches college. In comparison, static portfolios don't change with age and can range from conservative to aggressive growth types portfolios.

Investments in 529 plans are similar to the 401(k) plan at work. But instead of saving for retirement, you are saving for college and the use of after-tax dollars. You don't get an immediate tax deduction for saving in a 529 plan. With a 401(k) plan, you can put in pre-tax dollars and pay taxes on all of the money when you withdraw it in retirement. However, the earnings from the 529 plans grow tax-free if used for qualified college expenses such as tuition, fees, room, and board. As a result, 529 plans can provide significant tax savings, compared to putting the money in an interest-bearing account, where you pay tax on the interest.

Comparison of Plans

Since there is no state income tax in Texas, there is no tax deduction for saving in a 529 plan in this state. In addition, I made a comparison with the best college savings plan, the Utah My 529 plan, which is arguably the best 529 plan in the country. It has a Gold rating, according to Morningstar. This is the plan that I typically recommend, along with many other advisors. However, analyzing both the Utah plan and the Texas plan shows some critical cost differences.

The Texas and Utah plans offer low-cost passive index funds recommended for college savings plans. Both offer Vanguard and Dimensional Funds investment options, which are low-cost and provide excellent investment choices. However, the fees or expense ratios for the Texas age-based investments run around .40, while the Utah plan is much lower at .15.

In addition, there are numerous minimum account and investment balances for the Texas plan, while Utah has no minimums. Finally, the maximum funding amount is $25,000 less for the Texas plan. Also, the rankings for the Texas plan are non-existent for the most recent Morningstar 2021 ratings. On the other hand, the Utah plan has been Gold-rated since Morningstar started its rankings.

Texas 529 Plan

Overall, given that the Texas plan is more expensive and not ranked, I would go with the Utah plan. Texas has no state income tax, so the incentive to go with the Texas plan is not great. Having a state income tax deduction is one of the major reasons for going with your state 529 plan.

The Texas plan has improved over the years because of increased competition. I do hope it gets better in the future. However, given my focus on passive investments and keeping expenses as low as possible, it is better to focus on low fees since you should get the same market-like returns. Why pay more for the same investment returns?

Other Options

If you don't want to go with a highly-ranked plan, you could also see what your current brokerage offers. Many brokerages, such as Vanguard and Fidelity, offer 529 plans affiliated with states. Some parents like to keep all of their investments with these providers and not open another account since they already have their 401(k) with them. This is understandable, but make sure you do your due diligence to see what fees they charge and customer service.

The benefits of going directly to the state-based 529 plans are that they are focused solely on college savings. But I do understand the logistics of why someone would not want to open another account to save for college when they can use their existing investment account.

Non-Qualified Withdrawal Penalty

Alright, here's the issue: If you take cash out of a 529 plan and use it for stuff other than qualified education expenses, Uncle Sam might come knocking for federal income tax on the earnings part of that withdrawal. Plus, there's a chance you'll face a 10% federal tax penalty on those earnings.

And hey, watch out for state taxes and penalties – they could jump into the mix depending on what state you are in. Now, thanks to the Secure Act 2.0, you've got this option to shift money from a 529 plan to a Roth IRA, but there are some eligibility rules you gotta follow. Most notably, the account has to be open for 15 years, and you cannot contribute in the past five years.

Approaches for Saving for College

Deciding on the 529 plan is not the most important consideration. Actually, having a college savings approach is more important. There are three types of parental college savings approaches. First, there are the super savers who really stuff the 529 plan. They might have had large student loans or not much help with college.

You next get the undersavers, who put in very small amounts and contribute sporadically. These parents are just working around the margins and will get frustrated as college gets closer.

Finally, you have the naysayers who use excuses of why not to open up a 529 plan and find excuses such as, what if I don't use the money for college? What if my child does not go to college? And so forth.

What is the correct approach? It is somewhere in the middle, saving for college but expecting to pay some out of pocket and be flexible when your child attends college. I think, overall, you should expect to pay at least half of the cost of college and then pay as you go when the child starts college for additional expenses. This seems like a reasonable approach.


At the end of the day, it's essential to have a plan on how much you need to save for college. You can have the best college savings plan, but you may not be saving enough to reach your college savings goals or don't know how much college will cost.

I think saving for college and being proactive is much more important than the plan you choose to save in. Parents get stressed out about the overall cost of college, which is understandable, but at the same time, don't start save in a 529 plan. Just like saving for retirement, you need to be proactive and save for this large expense. Reach out to me below, and we can figure out how college savings fit into your overall financial goals.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. In addition, individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

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