529 Plan vs Regular Brokerage for College
Results
Visualization
How It Works
Both sides invest the same monthly amount at the same assumed return. The 529 balance is shown gross because qualified education withdrawals are federal-tax-free (and often state-tax-free). The brokerage balance subtracts income tax on the gains, approximated here as a flat tax rate applied to the growth portion at withdrawal; this is a simplification of real annual capital-gains taxation but captures the drag. If a share of the 529 is withdrawn for non-education, that portion of earnings incurs a 10% federal penalty plus ordinary income tax, which the tool estimates from the non-education percentage you set. The chart plots both balances year by year.
What Should You Do?
If college is the committed goal, a 529 is usually the better vehicle because the tax-free growth compounds with no annual tax bite. Check your state's 529 for an additional state tax deduction on contributions. Only expect the full advantage if the money is actually used for qualified education; if there is real risk you will not attend college, the brokerage's flexibility may outweigh the tax savings. You can change the beneficiary to another family member, which reduces the chance of a non-qualified withdrawal and penalty.
Frequently Asked Questions
Can I roll over unused 529 funds into a Roth IRA?
Yes. Under the SECURE 2.0 Act, beneficiaries can roll over up to a lifetime maximum of $35,000 from an unused 529 into a Roth IRA in their name, penalty-free and tax-free, provided the 529 plan has been open for at least 15 years.
How does a 529 user account compare to a custodial brokerage account (UTMA/UGMA)?
A parent-owned 529 is considered a parental asset on the FAFSA (assessed at a maximum 5.64%), whereas a custodial brokerage account (UTMA/UGMA) belongs directly to the student and is assessed at a steep 20%, drastically reducing need-based financial aid.
Is the brokerage tax model exact?
No. It applies your tax rate to gains at withdrawal as a simplification. Real accounts face annual realized capital gains, which can be higher or lower depending on trading.
What is the non-education penalty?
Withdrawals for non-qualified expenses incur a 10% federal penalty on the earnings portion plus ordinary income tax. The principal you contributed is never penalized.
Can I avoid the penalty?
Yes, by using the funds for qualified education or transferring the beneficiary to an eligible family member. Scholarships can also offset part of the penalty math.
Does a 529 hurt financial aid?
A parent-owned 529 is treated relatively favorably in federal aid formulas compared with student-owned assets, but rules are complex; check with the aid office.
Which tax rate should I enter?
Use your long-term capital gains rate for a buy-and-hold brokerage account; it is typically lower than your ordinary income rate.