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Tax Incentives


Anyone can benefit from the tax advantages of the LoneStar 529 Plan, regardless of income level, tax bracket or financial situation.

Tax-free Growth

Because earnings in 529 plans are not subject to federal or state taxes, the wind is at your back as assets in the account grow. As the chart below shows, the tax advantages of a 529 plan could mean the difference between funding a higher education and coming up short.

Tax-free Withdrawal

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 purposes, the earnings portion of the withdrawal is subject to ordinary federal income tax, any applicable state income tax and an additional 10% federal tax.

Chart illustrating the benefits of tax free growth. The hypothetical example depicts the growth of $10,000 investments upon a child's birth made into a tax-advantaged account and a taxable savings account. Over 18 years with a 5% annual rate of return, the investment in a tax-advantaged account grew to $24,066 while the taxable savings account grew to $18,096.

 

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 charges that may apply. If such fees or charges were taken into account, returns would have been lower.

Gift and Estate Tax Planning Benefits

In recognition of the importance of saving for higher education costs, 529 plans qualify for special gift tax exclusion. You can contribute up to $15,000 ($30,000 for married couples) annually per beneficiary, or up to $75,000 ($150,000 for married couples) prorated over a five-year period—without taxes.1

Keep in mind that your contributions are excluded from your estate.

Scholarship Withdrawals

Funds may be withdrawn without penalty if the beneficiary receives a scholarship (up to the scholarship amount), or in the event of the death or disability of the beneficiary. However, ordinary federal and state income taxes would be owed on any investment earnings.

1. If 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. Clients should consult their tax advisor.