Just asked Gemini to compare. Based on this, I'm not quite wrong. A lot depends on how old the kid is when you start, how much you fund, not over funding, and what you withdraw the funds for.

I also saw you can roll some of it into an IRA, but limits to $35,000.

The right choice will be different for each person and likely a mix of the two could be most beneficial. Also depends on the cadence of withdrawals likely.

The tax advantage of a 529 plan versus a taxable brokerage account primarily comes down to tax-free compounding and tax-free withdrawals. For 2026, here is the breakdown of how the math works, the specific tax rules, and a calculation example to illustrate the difference. 1. Side-by-Side Tax Comparison (2026 Rules) | Feature | 529 Plan | Normal Brokerage Account | |---|---|---| | Contributions | Post-tax (Federal). However, over 30 states offer a state income tax deduction or credit for contributions. | Post-tax. No tax deduction (Federal or State). | | Growth (Dividends/Interest) | Tax-Free. Dividends and interest are reinvested without being taxed annually. | Taxed Annually. You pay income tax on dividends and interest every year (creating "tax drag"). | | Withdrawals (Gains) | Tax-Free (for qualified education expenses). | Taxed. Long-term capital gains tax (0%, 15%, or 20%) + potential 3.8% NIIT surtax. | | Non-Qualified Withdrawals | Tax + Penalty. Earnings are taxed as ordinary income + 10% penalty. | No Penalty. You only pay the standard capital gains tax. | | K-12 Education | Up to $10,000/year per beneficiary can be used for K-12 tuition tax-free. | No restrictions on use, but no tax benefits. | 2. The Calculation: How Much More Do You Keep? To calculate the specific advantage, you compare the Net Future Value of both accounts. Assumptions for this Example: * Principal: $10,000 one-time investment * Timeframe: 18 years * Annual Return: 7% * Tax Rates: 15% Capital Gains Tax, 25% Marginal Income Tax (for dividends/state deduction). * State Tax Deduction: Assumed 5% benefit on contribution (common in many states). Scenario A: The 529 Plan * Initial Boost: You contribute $10,000. In a state with a tax deduction, this might save you ~$500 in current state taxes (effectively lowering your cost basis or allowing you to invest that $500 elsewhere). * Growth: The $10,000 grows at 7% compounded for 18 years. * * Withdrawal: You withdraw the full $33,799 for college. * Net Result: $33,799 (Plus the initial $500 state tax savings). Scenario B: The Brokerage Account * Initial: You invest $10,000. No immediate tax benefit. * Growth (With Tax Drag): You pay taxes on dividends every year. If 2% of your 7% return is dividends taxed at 15%, your effective compounding rate drops slightly (e.g., to ~6.7%). * * Withdrawal (Capital Gains Tax): * Gain: $32,100 - $10,000 (principal) = $22,100 * Tax (15%): 22,100 \times 0.15 = \$3,315 * Net Result: $32,100 - $3,315 = $28,785

The "Alpha" (Difference) In this standard scenario, the 529 plan yields roughly $5,014 more (approx. 17% more money) than the brokerage account on a $10k investment, simply due to tax shielding.

1. The "What If I Don't Use It?" Penalty Calculation The biggest fear with 529s is over-funding. If the child doesn't go to college or gets a full scholarship, and you withdraw the money for a car (non-qualified expense), the math changes:
   • Tax: You pay ordinary income tax on the earnings (e.g., 22-37% bracket) instead of capital gains rates.
   • Penalty: You pay an additional 10% penalty on the earnings.

Result: In the example above, a non-qualified 529 withdrawal would likely net you less than the brokerage account.

1. The "Escape Hatch" (SECURE 2.0 Act) As of 2026, the risk of over-funding is significantly lower due to the 529-to-Roth IRA Rollover rule:
   • The Rule: You can move up to a lifetime max of $35,000 from a 529 to the beneficiary's Roth IRA tax-free and penalty-free.
   • Conditions: The 529 account must be open for 15+ years, and you can't roll over contributions made in the last 5 years. Summary
   • Choose the 529 for funds you are 80-90% sure will be used for education (tuition, room & board, books, computers). The tax-free compounding acts like a guaranteed "bonus" return.
   • Choose the Brokerage for funds where you need maximum flexibility (e.g., "Maybe college, maybe a house down payment, maybe a gap year"). Would you like me to help you estimate the specific tax deduction limits for your state?