529 Plan vs. Brokerage Account Calculator

Choosing the right account, a 529 Account or regular brokerage account like Ally/Fidelity/Robinhood to invest, for college savings is a critical decision that involves a trade-off between tax benefits and flexibility. Depending on your financial situation and certainty about future education plans, one option may be significantly better than the other.

This calculator is designed to quantify that difference. It projects the long-term financial outcome of saving in a tax-advantaged 529 plan versus a taxable brokerage account, helping you make a more informed choice for your family's goals.

A piggy bank with a graduation cap on top, symbolizing savings for education.

Photo by Ksenia Chernaya on Pexels

What is a 529 Plan?

A 529 plan is a tax-advantaged savings account designed to help families save for future education expenses. Earnings in a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free.

  • Tax Benefits: Many states offer tax deductions or credits for contributions.
  • Qualified Expenses: Tuition, fees, books, supplies, and sometimes room and board.
  • Flexibility Limits: Non-qualified withdrawals may incur income tax and a 10% penalty on earnings.
  • Transferable: You can change the beneficiary to another family member without penalty.

This calculator helps you compare how a 529 plan stacks up against a regular taxable brokerage account, considering growth potential, tax savings, and flexibility.

At a Glance: 529 Plan vs. Brokerage Account

529 Plan

  • Tax-free growth for qualified education expenses.
  • State income tax deductions or credits may be available.
  • Penalties and taxes apply to non-qualified withdrawals.
  • Investment options may be more limited.

Brokerage Account

  • Complete flexibility to use funds for any purpose.
  • Unlimited investment options.
  • Investment gains are subject to capital gains taxes.
  • No special tax deductions for contributions.

Enter Your Savings Plan & Assumptions

Common Savings Inputs

Account-Specific Assumptions

The Flexibility Trade-Off: Non-Qualified Withdrawals

The main advantage of a brokerage account is flexibility. If your child doesn't go to college, you can use the funds for any other purpose without penalty. A 529 plan, however, is designed specifically for education. Withdrawing funds for non-qualified expenses comes with a cost, as calculated below.

Frequently Asked Questions (FAQs)

What are "qualified education expenses" for a 529 plan?
Qualified expenses include tuition, fees, books, supplies, and equipment required for enrollment at an eligible college or university. Room and board also qualify for students who are enrolled at least half-time.
Can I use 529 funds to study abroad?
Yes, you can use 529 funds for study abroad programs, provided the foreign institution is an eligible educational institution. To qualify, the school must be eligible to participate in the U.S. Department of Education's federal student aid programs. You can verify a school's status by checking the official Federal School Code List.
What happens if my child doesn't go to college?
This is where a 529 plan is less flexible. If you withdraw the money for non-qualified expenses, the earnings portion of the withdrawal will be subject to both ordinary income tax and a 10% federal penalty, as shown in the "Non-Qualified Withdrawal" section of the results. However, you can change the beneficiary to another eligible family member without penalty.
Is the 10% penalty on the whole account value?
No, and this is a very important distinction. The 10% federal penalty applies **only to the earnings** portion of your non-qualified withdrawal, not the contributions you made. Your original contributions can always be withdrawn tax-free and penalty-free. For example, if your account has $50,000 in it ($30,000 in contributions and $20,000 in earnings) and you withdraw all of it, the 10% penalty would only apply to the $20,000 of earnings, resulting in a $2,000 penalty.
Are there exceptions to the 10% penalty?
Yes. The 10% penalty on non-qualified withdrawals is waived in certain situations, such as if the beneficiary receives a tax-free scholarship, attends a U.S. military academy, or in the event of the beneficiary's death or disability. Note that while the penalty is waived, you would still owe ordinary income taxes on the earnings portion of the withdrawal.

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