529 against a taxable brokerage account in 2026: the after-tax gap, and what flexibility costs
Same money, same investments, two wrappers. The result turns on your tax bracket, your state and how sure you are the money will pay for school.
In the 529 at age 18
$286,912
$26,739 more than the same money in a taxable account, plus $8,460 of Missouri tax saved along the way.
| You put in | $180,000 |
| Growth, tax-free for school costs | $106,912 |
| Taxable account after tax | $260,173 |
| Missouri tax saved, 15 years | $8,460 |
Taxable account: dividends taxed every year and the remaining gain taxed at sale, at the 2026 federal capital gains rate for this income, NIIT where it applies, and your state marginal rate.
| Year | Child’s age | Put in | 529 balance |
|---|---|---|---|
| 3 | 6 | $36,000 | $39,243 |
| 6 | 9 | $72,000 | $85,981 |
| 9 | 12 | $108,000 | $141,648 |
| 12 | 15 | $144,000 | $207,948 |
| 15 | 18 | $180,000 | $286,912 |
Worked out by Radif Partners · How we calculate · federal rules from Public Law 119-21 and IRS Publication 970, state rules from each state · not tax advice
Put the same monthly sum into a 529 and into a regular brokerage account holding the same funds, and the 529 ends ahead whenever the money pays for qualified education, because neither its yearly dividends nor its final gain are taxed. How far ahead depends on your income. A Missouri couple at $520,000 pays 18.8 % federal on investment income in the taxable account, net investment income tax included, plus 4.70 % state, and the 529 leads by $26,739 at eighteen on $1,000 a month. An Illinois couple at $90,000 sits in the 0 % federal bracket for gains, so the lead shrinks to $1,945, most of it from state tax. The other side is flexibility: earnings taken out for anything else carry income tax and the 10 % additional tax. On our assumptions the Missouri couple must spend about 50 % of the account on school to beat the taxable account.
The rules of the duel
Both accounts receive identical deposits at the end of each month and earn an assumed 6 % a year, of which 1.5 % is paid as dividends. In the brokerage account those dividends are taxed every year at the long-term federal rate for the household's taxable income (0 %, 15 % or 20 %, thresholds from Rev. Proc. 2025-32), plus the 3.8 % net investment income tax (NIIT) above $200,000 single or $250,000 joint (IRS Topic 559), plus the state's marginal rate. Tax is paid out of the account, so less stays invested. At eighteen the account is sold and the gain above basis is taxed at the same combined rate. The 529 pays nothing along the way and nothing at the end, as long as the withdrawals cover qualified costs.
The engine treats dividends as qualified and holds every position for more than a year. A fund that throws off short-term gains or interest would widen the gap; a fund with almost no distributions would narrow it.
Five households, head to head
| Household | Taxable income | Federal rate on gains, NIIT included | 529 at 18 | Taxable, after tax | 529 lead | State break, all years |
|---|---|---|---|---|---|---|
| Missouri couple, $1,000/mo from age 3 | $520,000 | 18.8 % | $286,912 | $260,173 | $26,739 | $8,460 |
| Illinois couple, $250/mo from age 1 | $90,000 | 0.0 % | $86,942 | $84,997 | $1,945 | $2,525 |
| Michigan single, $500/mo from age 6 | $150,000 | 15.0 % | $103,974 | $97,493 | $6,481 | $2,550 |
| Utah couple, $300/mo from age 2 | $110,000 | 15.0 % | $94,936 | $87,144 | $7,792 | $2,563 |
| Texas single, $400/mo from age 3 | $120,000 | 15.0 % | $114,765 | $107,890 | $6,875 | $0 |
Two forces show up in the table. The first is the federal bracket on investment income. The Missouri couple sits in the 15 % gains bracket and above the NIIT line, so every dividend loses 23.5 % of its value before it is reinvested. The Illinois couple, at $90,000 joint, owes no federal tax on gains at all in 2026, which leaves only the 4.95 % Illinois rate working against the taxable account. The second force is the state deduction or credit, which the brokerage account never gets. For the Illinois couple it is worth $2,525 over the years, more than the growth gap.
The Texas single parent has neither a state tax on dividends nor a state break, so the $6,875 lead is pure federal tax. Run your own household through the calculator above; the mini below keeps the Illinois profile and lets the income move.
The Illinois profile at another income
In the 529 at age 18
$86,942
| You put in | $51,000 |
| Growth, tax-free for school costs | $35,942 |
| Taxable account after tax | $84,997 |
| Illinois tax saved, 17 years | $2,525 |
The price of flexibility
The brokerage account can be spent on anything. The 529 cannot, without a cost: the earnings part of a withdrawal that does not pay qualified expenses is taxed as ordinary income and carries the 10 % additional tax (IRS 529 questions and answers). Contributions come back untaxed in every case. Some states also add back deductions taken in earlier years; that is left out here and covered on the recapture page.
Take the worst case for the Missouri couple: none of the $286,912 goes to school and it all comes out in one year. 37 % of it is earnings, taxed at a 35 % federal marginal rate, plus $10,691 of additional tax and $5,025 of Missouri tax. They keep $233,777, against $260,173 from the taxable account. Taking it out over several years at a lower bracket would soften that, but the 10 % stays.
Missouri couple: the 529 spent on something else
Tax on this withdrawal
$52,760
| Earnings part | $106,157 |
| Federal income tax at 35 % | $37,155 |
| 10 % additional tax | $10,616 |
| Missouri tax and add-back | $4,989 |
How much has to go to school
Between the best case and the worst lies a break-even share: the part of the balance that must pay qualified costs for the 529 to finish level with the brokerage account, the rest being taken out as a non-qualified withdrawal.
| Household | Kept if all goes to school | Kept if none does | Taxable account | Break-even share for school |
|---|---|---|---|---|
| Missouri couple | $286,912 | $233,777 | $260,173 | 50 % |
| Illinois couple | $86,942 | $73,661 | $84,997 | 85 % |
| Michigan single | $103,974 | $91,744 | $97,493 | 47 % |
| Utah couple | $94,936 | $81,327 | $87,144 | 43 % |
| Texas single | $114,765 | $100,225 | $107,890 | 53 % |
The break-even share leaves the state deduction aside. Where the state does not claw it back on a non-qualified withdrawal, the deductions already banked lower the share further; where it does, they wash out.
A low break-even share means the 529 is hard to regret; a high one means the bet on school spending matters. The figures leave out escape routes that cut the cost further. A tax-free scholarship lifts the 10 % on an equal amount, though income tax on the earnings remains. The beneficiary can be changed to a sibling or cousin with no tax. And after fifteen years, up to $35,000 over a lifetime can move to the beneficiary's Roth IRA under conditions set out on the 529 to Roth IRA page. K-12 tuition of up to $20,000 a year, registered apprenticeship and credential costs, and up to $10,000 of student loans also count as qualified at the federal level.
Where the brokerage account keeps an edge
The taxable account has no list of allowed uses, no plan menu of investments and no state add-back to track. For a household in the 0 % federal gains bracket in a state with no income tax and no 529 break, the two accounts finish close, and the extra freedom can be worth more than a small tax gap. Everyone else should look at the lead in the first table and the break-even share in the second, then decide how certain the school spending is. The 529 calculator runs both accounts for any household.