529 Plans vs. Brokerage: Which Is the Best for College Savings?

Investment accounts come in handy when saving for college or university. They make your life easier when you or your child go to college. That said, let’s compare two investment accounts worth your attention. That is 529 plans vs. Brokerage accounts.

529 college savings plan basics


Note that if you don’t use your money for qualified education expenses, your earnings will be subject to a 10% penalty upon withdrawal and taxed as ordinary income. However, there is an exception for scholarships. You are also permitted to change the beneficiary and use the money for another family member, but still, there is risk involved in the process.

You can learn more here about 529 plans.

Brokerage account for college savings basics

Brokerage account

This is an investment account that comes without any special tax breaks and offers more flexibility than a 529 plan. With this account:

  • You can invest in whatever you want.
  • You have the freedom to withdraw as much money as you want at any time and for any reason.
  • You have the freedom to contribute as much as you want. As for the 529 plan, contribution limits are much higher than most people will ever need, but they’re not quite unlimited.
  • Basically, brokerage accounts are more flexible than 529 plans, with the trade-off being a lack of tax breaks if the money is used for qualified education.

How much are those 529 plan tax breaks worth?

We have talked about tax breaks, but how much are they worth? If you need money for something else other than education, how much money might those extra penalties and taxes cost you? Mostly, it depends on the tax rates, the amount you have contributed, and the timeline.

To help you understand this better, let’s consider this. You have contributed $100 per month from the time your child was born until the time he or she reaches age 18*.

If that money is used for education, your 529 plan will have $34,534 and $31,700 in the brokerage account. That means you have an extra $2,834 in the 529 plan.

If the money is used for something else, your brokerage account will still have $31,700. Your 529 plan now will have $30,427 available. That means an extra $1,273 in the brokerage account.

From the above example, you can see you will have an extra of $2,834 if money is used for education and a loss of $1,273 if you don’t. Other variables also affect the above numbers.

Below are the assumptions we made to run the numbers:

  • You invest 40% of your college savings in bonds and 60% in stocks.
  • Bonds return 2% annually and are taxed as ordinary income as earned.
  • The marginal tax rate is 25%.
  • Stocks return 6% annually. 2% is from qualified dividends, taxed annually at 15%. 4% of that is from capital gains that are deferred until withdrawal. 

529 Plan vs. Brokerage Account


Here are additional factors to consider as you weigh between using a brokerage account or 529 plan for your college savings:

  • What you intend to use the money for. If 100% sure you will use it for qualified education, a 529 is the best option. But if you are not sure what you will use the money for, it is better to use a brokerage account or striking a balance between them.
  • You benefit more from a 529 plan’s tax breaks by contributing more and starting to contribute early.
  • Tax breaks are a big plus if you are in a higher tax bracket. For example, when living in high-tax states that allows you to deduct 529 plan contributions.
  • If you have not paid high-interest debts and not on track for retirement, with an emergency fund in place, it is best first to prioritize them before contributing to a 529 plan.
  • If your child is going to attend K-12 private school at some point, 529 plans are a better option because you have more opportunities to use the penalty- and tax-free.


Both accounts are great and will benefit you in many ways. But before you decide on which to settle for, make sure to weigh your personal goals and financial situation. That way, it will be easier for you to make a sound decision. It is also ok to strike a balance between the two.


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