Common Mistake #39: Ignoring Tax-Efficient Education Accounts Like 529 Plans

Education costs tend to rise quietly and relentlessly. According to long-running data from the College Board's Trends in College Pricing reports, published tuition and fees at US colleges and universities increased substantially in inflation-adjusted terms over the past decades, rising significantly faster than general inflation before the late 2010s, even after accounting for financial aid and grants. Yet many families still save for education in ordinary taxable accounts - or don't save systematically at all - without considering tax-efficient options designed specifically for this goal.

This article explains why ignoring education-focused tax-advantaged accounts, such as 529 plans, is a common planning mistake, how it increases the real cost of education over time, and why the impact is often underestimated until expenses arrive.

Key takeaways

• Education savings are exposed to taxes if not structured intentionally.
• 529 plans allow investment growth to compound tax-free for qualified expenses.
• Time horizon makes tax efficiency especially powerful for education goals.
• Paying education costs with taxable dollars increases friction.
• Small planning gaps can translate into large funding shortfalls.

Why education savings often stay informal

Education planning rarely feels urgent - especially when children are young, or education is years away. Savings may sit in bank accounts, brokerage accounts, or general-purpose funds "for flexibility."

That flexibility feels responsible. Needs may change. Plans may evolve. Keeping money unrestricted feels safer than committing it to a labeled account.

Up to this point, nothing feels inefficient.

That's why this mistake is so common.

Here's the tax friction most families don't fully account for

Saving for education in a taxable account means returns are taxed along the way - through dividends, interest, or realized gains. Over long horizons, that tax drag compounds.

529 plans change that structure.

Under current US tax rules, investment growth in a 529 plan can be withdrawn tax-free when used for qualified education expenses. Some states also offer additional tax incentives for contributions.

So what? Two families saving the same amount, earning the same market returns, can end up with very different usable education funds - solely because of tax treatment.

This is where the planning gap becomes structural.

This is where time turns tax efficiency into leverage

Hypothetical example: Imagine two families saving for a child's education over 15 years. One uses a taxable investment account. The other uses a tax-advantaged education account.

Both contribute consistently. Both experience similar market returns. But one portfolio loses a portion of growth to taxes along the way. The other allows growth to compound uninterrupted.

By the time tuition bills arrive, the difference is meaningful - not because of risk-taking or timing, but because of structure.

Nothing dramatic happened. One plan simply kept more of what it earned.

Why does this mistake often go unnoticed until it's too late

Education costs arrive on a fixed schedule. Tuition bills don't wait for markets or tax planning catch-up.

When savings fall short, families often adjust reactively - drawing from other accounts, increasing debt, or reallocating resources under pressure.

At that point, the opportunity to let tax advantages compound over time has passed.

The issue isn't a lack of savings. It's inefficient saving.

Why 529 plans are commonly overlooked

Several concerns keep families from using education-specific accounts:

• Fear of locking money into a narrow purpose
• Uncertainty about future education paths
• Confusion about plan rules
• Assumption that taxable accounts are "good enough"

These concerns are understandable. But they often lead to defaulting into less efficient structures without revisiting the trade-offs.

Tax efficiency isn't about certainty. It's about probabilities over time.

The reframe that changes education planning

Families who address this mistake often adopt a simple reframe:

Education is a long-term goal with a known expense window - and structure matters.

This reframing shifts focus from account flexibility to cost efficiency.

Supporting considerations - such as understanding qualified expenses or coordinating education savings with other financial goals - exist to inform decisions, not to force uniform choices.

The goal isn't perfect planning. It's reducing unnecessary drag.

When 529 plans may not be the right fit

Education-focused accounts aren't universal solutions. Some families prioritize maximum flexibility. Others may have shorter timelines or uncertain education plans.

The distinction, consistent with the rest of this series, is awareness.

Ignoring tax-efficient education accounts becomes a mistake when the decision is defaulted, not when it's deliberate and informed.

While education costs may be uncertain, the strategy for funding them doesn’t need to be. How they're funded doesn't have to be accidental.