529 vs Taxable Account Calculator
What you are saving, and what tax you pay on it
Your result will appear here
Fill in the fields on the left and this updates as you type.
Know what this estimate is based on
- Jurisdiction
- General mathematical model
- Scope and limitations
- Educational estimate only. Confirm the assumptions, current rules, fees, and rounding that apply to your situation before making a decision.
- Source links checked
- Jul 30, 2026
Built and regression-tested by Smart Tools Lab. It has not been individually reviewed by a licensed financial, tax, or legal professional.
How to use
- 01
Enter what is in the account today and what you plan to add each month, then the years until the money is needed. The example uses $10,000 to start, $300 a month and fifteen years, which is $64,000 of contributions in all.
- 02
Enter the return you expect before tax, then the share of it that arrives as dividends each year. The example uses 6.5% with 30% of it as dividends, because that dividend portion is the part a taxable account is taxed on as it goes, while the rest compounds untouched until you sell.
- 03
Enter your marginal federal and state income tax rates and the long-term capital gains rate you expect on sale — 22%, 5% and 15% in the example. The first two tax the dividends each year; the third taxes the gain at the end.
- 04
Enter the state income tax you save on each dollar contributed to a 529. Every state is different, so use your own state's figure rather than the example's 5%, and check your plan's documents for a yearly cap before counting on the full amount.
- 05
Set the share of the balance you expect to spend on qualified education expenses. Leave it at 100 if you are confident; lower it to see what a non-qualified withdrawal costs, and read the figure for emptying the account entirely — $19,797 in the example.
Formula
Both accounts start with the same money and the same gross return. What differs is the tax. THE TAXABLE ACCOUNT pays income tax on its dividends every year, which lowers the rate at which it compounds: dividend yield = gross return × the share paid as dividends annual drag = dividend yield × (federal rate + state rate) effective return = gross return − annual drag At 6.5% gross with 30% arriving as dividends and a combined 27% rate, the effective return is 5.97%. On sale, the gain above what was contributed is taxed at the long-term capital gains rate: after-tax value = balance − (balance − contributions) × capital gains rate THE 529 compounds at the full gross return and pays no tax at all on qualified withdrawals. On the share that is NOT spent on qualified expenses, the earnings portion is taxed as ordinary income and charged an additional 10%: non-qualified cost = earnings × non-qualified share × (federal + state + 10%) THE STATE BENEFIT is applied to contributions rather than growth, because that is how state deductions and credits work: state tax saved = total contributed × the state benefit rate THE COMPARISON is then between what each account leaves spendable: advantage = (529 balance − non-qualified cost + state tax saved) − taxable after-tax value THE BREAK-EVEN is the first year at which that advantage turns positive. Where the whole balance goes on qualified expenses the 529 is ahead from the first year, because there is no offsetting cost to overcome; a large non-qualified share pushes the break-even out, and can push it past the horizon entirely.
Example
A family has $10,000 in a college account and adds $300 a month for fifteen years — $64,000 of contributions in total. They expect 6.5% a year, with 30% of that return arriving as dividends. They pay 22% federal and 5% state income tax, expect 15% on long-term capital gains, and their state gives back 5% of what they contribute to a 529. In the 529 the money compounds at the full 6.5% and reaches $117,505, of which $53,505 is growth. In the taxable account the dividends are taxed each year at the combined 27%, which drops the effective compounding rate from 6.5% to 5.97%. It reaches $111,493 — $6,013 less, purely from that annual drag. Selling it produces a gain of $47,493 above contributions, taxed at 15% for $7,124, leaving $104,369 spendable. The taxable account has paid $13,136 of tax in all. The family expects to spend the whole 529 balance on qualified expenses, so nothing is taxed on the way out. Adding the $3,200 of state tax saved on contributions, the 529 leaves $120,705 spendable. The 529 is therefore $16,336 ahead, and because there is no offsetting cost to overcome it is ahead from the first year. The figure worth knowing before committing is the exit cost. If this family had to empty the account for something other than education, the $53,505 of earnings would be taxed at 27% and charged a further 10% — $19,797 in all. The contributions would come back untouched.
Definitions
- 529 plan
- A state-sponsored account, named after section 529 of the Internal Revenue Code, whose earnings are never taxed provided withdrawals go on qualified education expenses. Contributions are not deductible federally.
- Qualified education expense
- Tuition, fees, books, supplies and equipment, room and board for a student enrolled at least half time, up to $10,000 of student loan repayment, up to $20,000 of K-12 tuition from 2026, and qualified postsecondary credentialing expenses.
- Non-qualified withdrawal
- Money taken from a 529 for anything else. The contributions come back tax-free; the earnings portion is ordinary income plus an additional 10%, with exceptions for death, disability, a scholarship and the service academies.
- Dividend drag
- The tax a taxable account pays each year on the dividends it receives, which lowers the rate at which it compounds. It is invisible on a statement and costs $6,013 over fifteen years in this page's example.
- Long-term capital gains rate
- The rate applied to the growth in a taxable account when it is sold, generally lower than ordinary income rates. A 529 avoids it entirely on qualified withdrawals.
Good to know
The tax that leaks out of a taxable account
The case for a 529 is usually made by pointing at the capital gains tax it avoids, and that is the smaller half of the story. The larger half is invisible on a statement. A taxable brokerage account holding ordinary funds receives dividends every year, and those dividends are taxed in the year they arrive whether or not a single share is sold. Money paid to the tax authority in year three is money that cannot compound in years four through fifteen, and that lost compounding is the quiet cost of holding college savings in a taxable account. This page models it directly. At a 6.5% gross return with 30% of that return arriving as dividends, and a combined federal and state rate of 27%, the effective compounding rate falls from 6.5% to 5.97%. Half a percentage point sounds trivial; over fifteen years on the example's $10,000 opening balance and $300 a month it costs $6,013. The taxable account reaches $111,493 where the 529 reaches $117,505, before anything has been sold. Then the sale happens, and the more familiar tax arrives: a gain of $47,493 above the $64,000 contributed, taxed at 15%, costing a further $7,124. The taxable account has paid $13,136 of tax in total and leaves $104,369 spendable. The 529 pays neither tax. It compounds at the full 6.5% and, provided withdrawals go on qualified education expenses, hands over the whole $117,505 untouched. Add the $3,200 of state income tax the family saved on contributions along the way and the 529 leaves $120,705 — $16,336 more, or roughly a quarter of everything ever contributed, earned purely by choosing a wrapper. Because there is no offsetting cost to overcome when the money is genuinely destined for education, the 529 is ahead from the first year rather than needing a long holding period to break even. The break-even only stretches out when a meaningful share of the balance is expected to come out non-qualified, which is the scenario the next section deals with.
What it costs to take the money out for something else
The objection to a 529 is always the same, and it deserves a precise answer rather than reassurance: what happens if the child does not go to college, or does not need the money. The penalty is real but narrower than its reputation. Contributions come back entirely untouched, because tax was already paid on them before they went in — there is no penalty on your own principal, ever. Only the earnings are exposed, and they are hit twice: added to ordinary income, and then charged an additional 10% under 26 U.S.C. 529(c)(6), which applies the tax in 530(d)(4). In this page's example, emptying the whole account for a non-education purpose would expose $53,505 of earnings to a combined 27% income tax rate plus the 10%, costing $19,797. That is a genuinely unpleasant number, and it should be set beside the $16,336 the 529 is ahead by. The four statutory exceptions are worth knowing because the most likely one is also the most reassuring. Under 530(d)(4)(B) the additional 10% does not apply where the distribution is made on or after the death of the designated beneficiary; where it is attributable to the beneficiary's disability; where it is made on account of a scholarship the beneficiary received, up to the amount of that scholarship; or where it is made because the beneficiary is attending one of the five United States service academies, up to the cost of that attendance. The scholarship exception answers the most common worry directly: a child winning a large scholarship does not trap the family's savings behind a penalty. In all four cases the earnings are still ordinary income — it is only the 10% that falls away — so the money is not tax-free, merely not punished. Before any of that, though, the cheaper routes should be exhausted: the beneficiary can be changed to another family member with no tax consequence at all, the account can pay up to $10,000 of student loans, and leftover money can be rolled to the beneficiary's Roth IRA up to $35,000 across their lifetime.
The state benefit nobody can look up for you
There is no national 529 deduction, and this is the single most misunderstood aspect of these accounts. The federal government's contribution is the tax-free growth and nothing else — contributions are made with after-tax money and are not deductible on a federal return. Every deduction or credit you have heard about is a state benefit, written by an individual state legislature, and they differ so completely that no default figure on a calculator could be honest. That is why this page asks you to type your own rate rather than assuming one. The shapes vary in ways that change the arithmetic substantially. Some states allow a deduction against state taxable income, which is worth your state marginal rate multiplied by the contribution, and almost always up to an annual cap — a few thousand dollars a year is common, so a family contributing more than the cap gets no benefit on the excess. Some states give a credit rather than a deduction, which is worth its face value regardless of your tax rate and is therefore far more valuable to a lower earner. Some grant the benefit only for contributions to that state's own plan, which is a real constraint if another state's plan has markedly lower fees; others allow it for any state's plan. And several states have no income tax at all, so there is nothing for a deduction to work against and the only benefit available is the federal tax-free growth. In this page's example a 5% state benefit applied to $64,000 of contributions over fifteen years is worth $3,200 — meaningful, roughly a fifth of the total advantage, but plainly not the main event. The practical steps are short. Look up your own state's plan documents rather than a general article, find the annual cap, check whether the benefit is restricted to the in-state plan, and check whether the state claws the benefit back if you later take a non-qualified withdrawal, which several do. Then put the resulting rate into this page and see what it is actually worth.
What qualifies now, and what a 529 does to financial aid
Two facts have changed enough in recent years to be worth restating, because both make a 529 more attractive than older guidance suggests. The first is the definition of a qualified expense, which has widened a long way beyond tuition at a four-year college. It now covers tuition, fees, books, supplies and equipment at any eligible institution, room and board for a student enrolled at least half time, and up to $10,000 of student loan repayment for the beneficiary — and the same again for each of their siblings. Public Law 119-21 went further for tax years beginning after 2025: it raised the limit on K-12 tuition to $20,000 a year, broadened qualifying K-12 costs to include curriculum materials, outside tutoring by an unrelated qualified instructor, standardised and Advanced Placement test fees, dual enrolment fees and educational therapies, and added qualified postsecondary credentialing expenses — the licences and professional certifications that were never a college course at all. A family worried about overfunding should read that list before assuming the money is trapped, because the range of things it can legitimately pay for is now wide enough that most balances find a use. The second is the effect on financial aid, which is real but modest and frequently overstated. A parent-owned 529 is a reportable parent asset on the FAFSA and is converted at 12%, so the example's $117,505 balance would add roughly $14,101 to the Student Aid Index. That is not nothing, and it is worth planning for. But it compares favourably with the 20% rate applied to assets held in the student's own name, which is the single strongest argument for keeping the account in a parent's name rather than transferring it to the child. Set that $14,101 against the $16,336 of tax the 529 saves and the account still wins comfortably. What no calculator can price is the flexibility a taxable account keeps: it can be spent on a car, a house deposit or a business without anyone's permission, and where there is genuine doubt about whether the money will ever be spent on education, that freedom is what the 529's advantage is buying.
Frequently asked questions
Is a 529 actually worth it compared with a normal brokerage account?
On these numbers, clearly yes. The example's $64,000 of contributions reaches $117,505 in a 529 and $111,493 in a taxable account, and after tax on withdrawal the 529 leaves $120,705 spendable against $104,369 — an advantage of $16,336, or about a quarter of everything contributed. The gap comes from tax leaking out of the taxable account: $6,013 on dividends along the way and $7,124 of capital gains tax at the end, $13,136 in all.
Where does the difference actually come from?
Two places, and the smaller one surprises people. The obvious part is the capital gains tax on the sale. The quieter part is the annual drag: the taxable account pays income tax every year on the dividends it receives, so an investment returning 6.5% gross with 30% of that as dividends effectively returns 5.97% once a combined 27% rate is applied. Compounded over fifteen years that difference alone costs $6,013. A 529 pays neither tax, provided the money goes on qualified expenses.
What does it cost to take 529 money out for something else?
Only the earnings are hit, and they are hit twice. Contributions come back untouched because tax was already paid on them. The earnings are added to your ordinary income and then charged an additional 10% on top (26 U.S.C. 529(c)(6), applying 530(d)(4)). In the example, emptying the account non-qualified would cost $19,797 — a 27% combined income tax rate plus the 10%, applied to $53,505 of earnings. That is painful but it is not confiscatory, and it is worth comparing against the $16,336 the 529 is ahead by.
Are there exceptions to the 10% additional tax?
Four, listed in 26 U.S.C. 530(d)(4)(B). A distribution made on or after the death of the beneficiary; one attributable to the beneficiary's disability; one made because the beneficiary received a scholarship, up to the amount of that scholarship; and one made because the beneficiary is attending one of the five United States service academies, up to the cost of that attendance. In every one of those the earnings are still ordinary income — it is only the 10% that falls away. The scholarship exception is the practical one: a child winning a large scholarship does not trap the money.
What does my state give me for contributing?
There is no national answer, which is why it is a field on this page rather than a fixed figure. The federal benefit is the tax-free growth and nothing else. Each state writes its own rule: some allow a deduction against state income tax up to a yearly cap, some give a credit — which is worth its face value rather than your tax rate — some allow it only in that state's own plan, and several have no income tax for it to work against. The example's 5% is worth $3,200 over fifteen years of contributions. Check your plan's documents for the cap, because a few thousand dollars a year is common and would reduce that.
What counts as a qualified expense now?
Considerably more than tuition at a four-year college. It covers tuition, fees, books, supplies and equipment at any eligible institution, room and board for a student enrolled at least half time, and up to $10,000 of student loan repayment for the beneficiary or a sibling. For tax years beginning after 2025, Public Law 119-21 raised the K-12 tuition limit to $20,000 a year, broadened K-12 expenses to include curriculum materials, outside tutoring by an unrelated qualified instructor, standardised and AP test fees and educational therapies, and added qualified postsecondary credentialing expenses — the licences and certifications that were never a college course.
Does a 529 hurt my child's financial aid?
Less than most people fear, if the parent owns it. A parent-owned 529 is a reportable parent asset on the FAFSA and is converted at 12%, so the example's $117,505 would add about $14,101 to the Student Aid Index. An account in the student's own name would be assessed at 20% instead. Set that against the $16,336 of tax saved and the 529 still wins comfortably — but it is a real cost and it is worth knowing before assuming the account is invisible.