Skip to main content

Main Header

Important Notifications

529 Plans: Paying for Higher Education

May 13, 20195 minute read

When it comes to saving for your children’s education, 529 accounts are typically underutilized, even though they could be a beneficial way to pay for higher education expenses. A recent report published by Morningstar found that only 16 percent of households with young children are using these type of plans. Morningstar’s report, written by Head of Behavioral Science, Stephen Wendel, estimates that: American families are leaving more than $237 billion on the table by not investing their college savings in 529s.

Part of the missed opportunity, as the report goes on to explain, is owed to the tax benefits that these plans offer. But the bulk of this estimate is derived from the missed opportunity of investing in markets. Not only are families not taking advantage of 529 accounts, they are putting the money in savings accounts earning low interest rates.

If you take an 18-year old senior in high school today; he or she was born in the year 2000. During this child’s lifetime, the stock market has experienced two significant down markets. But even taking that into consideration, there is a tremendous difference between the account balances of a cash savings account, and one that has been invested. This example assumes that a family saved $100 per month from birth in January 2000 to September 2018. The difference between saving in cash and a 60/40 portfolio, which is typically considered a “balanced” allocation, is almost $24,000. That could pay for an entire year of tuition plus room and board at many public in-state universities! Please note that past results do not guarantee future returns but do show an interesting comparison.

In other words, by not participating in a 529 plan to save for college, families may not be taking advantage of the options available to meet their objectives. Here is a general overview on the benefits and misconceptions about 529 plans.

When funds from a 529 plans are withdrawn for qualified education expenses, these dollars are withdrawn tax-free. Also, since these are state-run plans, some states allow a small state income tax deduction for contributions (not applicable in Washington). Earnings also grow tax-deferred, which allows for more compounding growth.

A 529 savings plan can be used to fund qualified education expenses at most colleges and universities whether it be a public or private institution. There are even some foreign colleges and universities that are eligible.

You do not have to open a 529 account in your state of residence. Since each state runs their own plan, there are different investment options available. You are free to choose whichever plan suits your objectives the best.

The 2017 tax bill now also allows for 529 withdrawals up to $10,000 per year to pay for private K-12 tuition (check with your tax adviser for your individual situation).

The caveat with these plans is that you must use the funds to pay for qualified education expenses, otherwise withdrawals are taxed and earnings are charged a 10 percent penalty. However, you can change the beneficiary of a 529 to any qualified family member (including yourself if you plan to go back to school) and use the account to pay for their education expenses.

The costs of higher education and the growing mountain of student loan debt is becoming a burgeoning problem. Between 1985 and 2011, average tuition increased 498 percent – more than four times the rate of general inflation1. The reality is that many families will still need to utilize a mix of savings, grants, scholarships, loans, and employment income to foot the bill. But starting a 529 account as early as possible could dramatically help with the burden of higher education costs.

Brett Lathrup


Securities offered through LPL Financial member FINRA/ SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Financial planning services may be offered through Washington State Employees Credit Union d/b/a WSECU Investment Management, a registered investment advisor and separate entity from LPL Financial. Financial planning and other advisory services may be offered through LPL Financial, a registered investment advisor.

Not NCUA Insured | No Credit Union Guarantee | May Lose Value

WSECU Investment Management is a registered investment advisor in the State of Washington. The advisor may not transact business in states where it is not appropriately registered, excluded, or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.

WSECU and WSECU Investment Management are not registered broker/dealers, nor are they affiliated with LPL Financial.

The LPL Financial registered representatives associated with this site may only discuss and/or transact business with residents of the following states: AK, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, LA, MA, MD, ME, MI, MO, MN, MT, NC, NE, NJ, NM, NV, OH, OK, OR, PA, SC, TN, TX, UT, VA, WA, WI, WV.

NDIP (Non-deposit Investment Products) may be offered by an employee who serves both functions of the credit union and the selling of non-deposit investment products.

Your Credit Union (“Financial Institution”) provides referrals to financial professionals of LPL Financial LLC (“LPL”) pursuant to an agreement that allows LPL to pay the Financial Institution for these referrals. This creates an incentive for the Financial Institution to make these referrals, resulting in a conflict of interest. The Financial Institution is not a current client of LPL for brokerage or advisory services. Please visit for more detailed information.

Your perspective is important to us and helps us see where we’re hitting the mark and where there might be areas to improve.