529 vs Taxable Account Calculator

Legal basis: IRC §529 (qualified tuition programs); IRC §529(c)(3) (qualified education expenses); IRC §529(c)(6) (earnings exception for scholarships); IRC §72(t) and §529(c)(3)(B) (10% additional tax on non-qualified earnings) · checked 2026-10-04 · Rates and limits change — verify the current figures.

A 529 plan is a state-sponsored education savings account built around one promise in IRC §529: money inside the account grows tax-deferred, and withdrawals — including all the growth — come out completely tax-free when used for qualified education expenses. A regular brokerage or savings account enjoys no such treatment: dividends and interest are taxed every year, funds that trade produce distributed gains, and the final gain is taxed when you sell. Over a 15- or 18-year horizon, the compounding difference between untaxed and annually-taxed growth is usually the largest single factor in the comparison, bigger than fee differences or state tax credits.

The catch is what happens when the money is not used for education. A non-qualified withdrawal from a 529 plan taxes the earnings portion at your ordinary income rate and adds a 10% additional federal tax on those earnings — a penalty designed to punish conversions, not to generate revenue. Two important exceptions soften the edge: if the beneficiary earns a scholarship, you can withdraw up to the scholarship amount without the 10% penalty (the earnings are still taxed), and beneficiary changes to a sibling or other close family member, or rollovers within limits, keep the account qualified.

The trade-off is use restriction. Money in a taxable account can pay for anything — a car, a gap year, a down payment — with at most capital-gains tax on the profit. Money in a 529 plan is earmarked for education (tuition, fees, books, computers, and room and board within the school's cost of attendance; K-12 tuition up to a limited annual amount is also allowed under current law). If you are confident the funds will fund education, the 529's tax-free growth dominates; if the child may not attend college, the flexibility of taxable money is worth real money too. Some states add their own deductions or credits for contributions, which further favors the 529, while a few states restrict their benefit to their own plan.

This calculator projects both paths from the same contributions: the 529 compounds at the full return, while the taxable account loses an annual tax drag you specify. Withdrawals can be modeled as qualified or non-qualified, so you can see the penalty scenario before committing. The result is an educational estimate, not tax or investment advice: state tax treatment, fees, and federal rules on K-12 and rollover limits change with legislation, so confirm details with the IRS guidance or a CPA.

This calculator is an educational estimate, not tax or investment advice. Both accounts are modeled with the same gross return and constant contributions, the tax drag is an approximation of dividends and distributed gains, and federal rules on qualified expenses, K-12 use, and penalties change with legislation. Confirm details with IRS Publication 970 or a CPA.