529 Plan vs. Brokerage Account: Which Fits Your Goals?
When saving for a child’s future, where you put your money can be as important as how much you save. Two popular options are a 529 education savings plan and a taxable brokerage account.
Both allow you to invest for the future, but they differ in their tax treatment and how you can use the money. Understanding these tradeoffs can help you decide which option—or combination of options—fits your goals.
What Is a 529 Plan?
A 529 plan is a tax-advantaged account designed for education savings. You can open one for a child, grandchild, another family member, or even yourself, then choose from the investment options offered by the plan.
Although contributions aren’t deductible from federal income taxes, investment earnings can grow free from federal income tax. Some states also offer an income tax deduction or credit for contributions.
Withdrawals that meet federal requirements and limits are generally free from federal income tax when used for qualified expenses, such as:
- College or university
- K–12 education
- Apprenticeship programs
- Student loan repayment
- Professional credentialing
If you use funds for an unqualified expense, any earnings on investments will be taxable, and you may owe a 10% penalty.
One of the greatest flexibilities offered with 529 plans is the ability to avoid taxes on unused savings. You can change the account to a new beneficiary if there are excess or leftover funds. You may also be able to roll over a remaining balance into a Roth Individual Retirement Account (IRA) to keep saving towards the original beneficiary’s future.
What Is a Brokerage Account?
A brokerage account allows you to invest in assets such as stocks, bonds, mutual funds, and exchange-traded funds.
Unlike a 529 plan, a brokerage account isn’t tied to a particular goal. You can use the money for education, a home, a major milestone, or another financial priority.
That flexibility comes with fewer tax advantages. Dividends and interest may be taxable even when reinvested, and selling an investment for more than you paid may result in capital gains taxes. Depending on who owns the account, a brokerage account may also affect the student’s eligibility for financial aid.
How Do the Accounts Compare?
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Which Account Should You Choose?
If education is your primary goal, a 529 plan’s tax advantages make it a strong choice. These benefits can become more meaningful as your money has more time to grow.
If you’re saving for several goals or want greater control over how you use the money, a brokerage account may offer more flexibility.
You don’t necessarily have to choose only one. Some families use a 529 plan for education and a brokerage account for other long-term goals.
Start by considering what you’re saving for, when you’ll need the money, how much flexibility you want, and which tax benefits may be available to you.
Ready to learn more? Explore 529 plans with Vestwell and review the Internal Revenue Service’s (IRS) 529 plan resources for information about federal tax rules.
This material is provided for general informational purposes only. This publication should not be interpreted or relied upon as a recommendation or endorsement of any investment or strategy. Past performance is not a guarantee of future results. Tax rules and 529 plan features vary, and state and federal laws may change.Vestwell and its affiliates do not provide legal, financial, tax, or investment advice. All investments have risk, including the loss of principal. Investors should consider engaging their own financial professional before making any investment decisions.