Net 529 after-tax advantage
+$16,592
529 after-tax ($147,492) vs Brokerage after-tax ($130,900)Example calculationYes, the 529 plan beats a taxable brokerage account
Over 18 years, investing $69,800 out of pocket into a 529 plan grows to $147,492 after tax vs $130,900 in a taxable brokerage account (+$16,592 net advantage). You earn $3,490 in state income tax breaks and avoid $10,782 in dividend and capital gains taxes.
Net 529 advantage
+$16,592
$147,492 529 vs $130,900 brokerageState tax breaks earned
$3,490
5% state break reinvested over 18 yrsBrokerage tax avoided
$10,782
$2,327 dividend + $8,455 cap gains taxBreak-even college use
30% of fund
Min education use for 529 to winSide-by-side 529 vs taxable brokerage breakdown
| Account item | 529 college plan | Taxable brokerage |
|---|---|---|
| Out-of-pocket contributions | $69,800 | $69,800 |
| Reinvested state tax deductions (5%) | $3,490 | $0 |
| Annual fund expense ratio | 0.2% | 0.05% |
| Ending balance before withdrawal taxes | $147,492 | $139,355 |
| Dividend tax drag + liquidation cap gains tax | $0 | -$10,782 |
| SECURE 2.0 Roth IRA tax-free rollover used | $0 | $0 |
| Non-qualified 529 tax, 10% penalty & recapture | $0 | $0 |
| Final after-tax spendable balance | $147,492 | $130,900 |
How time horizon changes the 529 advantage
See how tax-free compounding widens the gap between a 529 plan and a taxable brokerage account over time:
| Years invested | Out-of-pocket cash | 529 after-tax value | Brokerage after-tax value | Net 529 advantage |
|---|---|---|---|---|
| 3 yrs | $15,800 | $18,927 | $17,740 | +$1,186 |
| 6 yrs | $26,600 | $35,597 | $32,945 | +$2,653 |
| 9 yrs | $37,400 | $55,905 | $51,144 | +$4,761 |
| 12 yrs | $48,200 | $80,644 | $72,985 | +$7,659 |
| 15 yrs | $59,000 | $110,780 | $99,252 | +$11,528 |
| 18 yrs | $69,800 | $147,492 | $130,900 | +$16,592 |
How this calculator works
A 529 plan gives you two tax advantages: many states let you deduct contributions on your state income tax return, and all investment growth is completely exempt from federal and state taxes when spent on qualified education expenses (college tuition, room and board, books, computers, apprenticeship programs, and up to $10,000 per year of K-12 tuition). A regular taxable brokerage account offers unrestricted liquidity and ultra-low ETF fees (0.03% to 0.05%), but you pay taxes each year on dividends and long-term capital gains tax when you sell shares.
Non-qualified withdrawal penalties and the $35,000 Roth IRA rollover
The biggest fear parents have with a 529 plan is overfunding it or having a child skip college. First, remember that the 10% federal penalty and ordinary income tax apply only to the earnings portion of a non-qualified withdrawal: your original contributions always come back tax- and penalty-free. Second, under the SECURE 2.0 Act, up to $35,000 of leftover 529 funds can be rolled tax- and penalty-free into a Roth IRA for the beneficiary once the account has been open for at least 15 years, subject to annual Roth contribution limits.
Frequently asked questions
What happens if my child gets a scholarship?
If your child earns an academic or athletic scholarship, you can withdraw up to the exact dollar amount of the scholarship from the 529 plan without paying the 10% federal penalty. You only pay ordinary income tax on the earnings portion of that withdrawal (and if distributed directly to the student, it is taxed at the student's lower tax bracket).
When does a regular brokerage account beat a 529 plan?
A taxable brokerage account can beat a 529 plan if you live in a state with no 529 tax deduction, invest in a high-fee advisor-sold 529 plan charging 0.75% to 1.00% per year, and end up withdrawing most of the account for non-educational purposes beyond the $35,000 Roth IRA rollover limit.
Can I change the beneficiary on a 529 plan?
Yes. You can change the beneficiary at any time, tax- and penalty-free, to a sibling, first cousin, parent, spouse, or future grandchild to use for their qualified education.
Benchmark sources and dates
Starting assumptions are example benchmarks, not binding quotes. Change any input to match your own bills or offers.
| Assumption / Input | Starting value | Source | Checked |
|---|---|---|---|
| Federal 529 qualified withdrawal tax rules, non-qualified 10% penalty, and SECURE 2.0 $35,000 Roth IRA rollover | 0% tax on qualified withdrawals, 10% penalty + income tax on non-qualified earnings, up to $35,000 lifetime Roth IRA rollover | Internal Revenue Service Publication 970 Tax Benefits for Education | 2026-04-01 |
| Direct-sold 529 plan asset-weighted expense ratio vs low-cost index ETF expense ratio | 0.20% 529 expense ratio vs 0.05% brokerage ETF expense ratio | Morningstar 529 College-Savings Plan Landscape Report | 2026-04-01 |
| State 529 income tax deduction caps and marginal state income tax rates | $10,000 annual deduction cap at 5.0% state marginal rate | Savingforcollege and Tax Foundation State 529 Tax Deduction Guide | 2026-04-01 |
| Taxable brokerage dividend yield and federal long-term capital gains tax rate | 1.5% annual dividend yield, 15% long-term capital gains tax rate | Internal Revenue Service Topic No. 409 Capital Gains and Losses | 2026-04-01 |