Texas 529s and 529s in general
January 16, 2022 1:12 PM   Subscribe

We are moving to Texas later this year and I want to use some of the proceeds of our home sales in our current state to start 529s there for our kiddos. But I am OVERWHELMED with the information.

I have a financial advisor who can help to start and manage said funds. However, I learn best by researching and reading on my own and her preferred method of giving information is a lecture (very interesting, but doesn't work for me). I need to get a better handle on the big picture before I go back to her with more specific questions.

Does anyone have experience with 529s in Texas both establishing them and using them? Are there articles that you can point me to about the advantages of a 529 versus say a Uniform Transfer to Minor Account? My advisor was leaning in the UTMA direction but I'm unclear on the tax implications. My concern is having money in the 529 that is left over after the child finishes their education and we are penalized for taking it out. Thanks in advance!
posted by tafetta, darling! to Work & Money (7 answers total)
Money in a 529 grows tax free (no tax on capital gains and dividends) and is not taxed if withdrawn to use to pay for education. Contributions are also often tax deductible against state (but not federal) income tax. Those are all big tax advantages. A UMTA has none of those tax advantages - it is just a regular taxable account for the kid, with a parent/guardian in control of the account. The money in the UMTA is taxed just like any taxable investment account - either the kid has to file a tax return or the parent/guardian can sometimes include the UMTA income/gains on their own return.

As far as overfunding a 529, my own take is that college/post-grad is so expensive and increasing beyond the rate of inflation so much that it is much more likely you will under-fund than over-fund. But, if you do wind up with "too much" in a 529, there are ways to change the beneficiary so that you can use the money to pay for a different kid and/or a grandkid's education.

There is good information on Fidelity's site, for a start.

PS - investing some money in a 529 is super easy - it looks like there are age-based "Target Date" funds in the Texas plan. You don't need anyone to lecture you on it!
posted by Mid at 1:50 PM on January 16 [3 favorites]

I am not familiar with Texas 529s. My experience is with Fidelity in Massachusetts.

My experience is that the 529s emphasize simple investment options. They don't expect you to actively manage the investments. It is designed to be a "set it and forget" system. In Massachusetts there are age-targeted options, which automatically adjust the investment strategy as your child approaches college age.

This is all to say that you should not be paying a financial advisor to help with your 529 on an ongoing basis. It shouldn't take that kind of support. It should be the sort of thing where you sit down with someone for a couple of hours, get it all set, and be done. If your current financial advisor expects to be making money from you for managing your 529 year after year, I suggest you look for someone else, preferably a Fee-Only Financial Advisor.
posted by Winnie the Proust at 2:51 PM on January 16

Just one note - as you may already know, you can invest in a 529 plan from any state (i.e., you are not limited to plans based in Texas). Little Synesthesia's 529 plan (called my529) is based in Utah; we are not Utah residents, but found this plan to be rated as one of the best, and contributions to 529 plans based in our state of residence are not tax-deductible (hence, we didn't feel as tied to investing in a plan from our own state). It may be worth exploring whether a plan based in another state might be the best fit for your family.
posted by Synesthesia at 3:43 PM on January 16

Seconding the advice about looking at 529 plans from any state, but I believe you only get the state income tax deduction for contributions to the in-state plan. So you need to weigh that in your calculations.
posted by misterbrandt at 5:06 PM on January 16

If you don't use the money for money in a 529 for education for the designated child, you can either transfer the funds to another close relative to use for their education or you can just take back the money and pay taxes on the earnings (not the original contributions) plus a penalty*. The federal penalty is an extra 10% tax on the earning (plus there may be a state penalty).

There are lots of options for rolling it over to another family member, starting with graduate school for beneficiary, and extending to holding on to it for a future grandchild.

If you think there is a high probability that most if not all of the money will be used for education, the value of allowing what you use to grow tax free will outweigh the 10% penalty if you take some of it back later (the taxes that you owe, you would have paid anyway).

*Note the penalty is also waived if the beneficiary gets a tax free scholarship or if the benficiary dies or becomes disabled.

Here's one summary of this
posted by metahawk at 6:19 PM on January 16 [1 favorite]

Article from Bogleheads on 529s and UTMA.

Article recommended by a coworker comparing the two (I'm linking to the wayback machine, as the article no longer appears on the Wells Fargo website.)

Here's a nice website to compare the 529 plans associated with Vanguard to the options in other states.

I have a 529 plan associated with Vanguard (in a different state), because I can simply invest in a target date fund with low fees. It seems strange that you would need a financial advisor to manage the 529 as investment options are usually limited. There are no tax advantages for using the plan in my state.

Another thing to mention - you can invest up to 5 years worth of money in one year (see 5-year election) (and then you don't contribute anything for the next 5 years...). Since you're looking to fund the 529 with proceeds from selling a house, this might be a nice option to front load the account.

In talking with a person from Schwab (paid by my company, and who seems reasonable), the advice was to only put up to 75% of whatever you want to fund in the 529 (e.g. 4 years of in-state tuition).
posted by skunk pig at 10:06 PM on January 16

I'm another Texan who is putting my kids' college savings in the Utah 529. Since Texas has no state income tax, there is no advantage whatsoever to using Texas' own 529, and it's not one of the better ones. Pick whichever state has the 529 plan that looks best to you and put your money there.
posted by Pater Aletheias at 7:31 AM on January 17 [1 favorite]

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