Is it better to make a long-term investment in a 529 account or a post-tax account? Assume the terminal use of funds is not a qualified expense.
What is the right way to do this analysis? Below is what I have so far.
- Just had first kid
- Maxed out SIMPLE IRA; 401K
- Over limit for additional IRA contributions
- Followed all instructions for the Reddit Spending Flowchart
- 20 year horizon, no need to touch the money
- 100% VFINX or similar
The limit in PA is $30,000 per year. We do the analysis for a one-time payment and one-time withdraw.
With a post-tax account this is assumed post-tax rate of 9.53% growth.
$30,000 × 1.095320 = $185,260
With a 529 plan, this is pre-tax at 10.99% growth but 10% penalty on the growth at withdraw.
$30,000 × ((1.109920 - 1) * 0.9 + 1) = $220,290
Long term growth rates before and after taxes for VFINX: http://performance.morningstar.com/fund/tax-analysis.action?t=VFINX®ion=usa&culture=en_US
Note: the reason growth rates are different is because the fund is buying and selling on your behalf which creates taxable events.