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.


  • Married
  • Just had first kid
  • Maxed out SIMPLE IRA; 401K
  • Over limit for additional IRA contributions
  • Followed all instructions for the Reddit Spending Flowchart
  • Pennsylvania


  • 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&region=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.

  • Because 10.99% exceeds 9.53% by over a factor of 1.1 then we can extend then the number of years does not matter. That means the analysis applies to going to school as well. If expenses will be qualified then more funds are available (no 10% penalty). If not going to school then you can still take funds out at year 14 to avoid the penalty of having a 529. Dec 2, 2018 at 22:26
  • 4
    So you have no intention of sending your kid to college? Do you have an HSA available to you?
    – D Stanley
    Dec 3, 2018 at 14:50
  • what does the following mean: If not going to school then you can still take funds out at year 14 to avoid the penalty of having a 529. Dec 3, 2018 at 17:08
  • Can you invest in VFINX or a similar fund in a 529? I seem to recall that 529s have some restrictions that steer the investment towards a more conservative option.
    – Freiheit
    Dec 3, 2018 at 19:53
  • There is a penalty of having money in a 529 -- namely your cost of education goes up. This is because the cost of education is based on the money you have. To avoid avoid complexities in that branch of the game theory analysis, we assume not going to college. And because money can be taken out in year 14 that is is clean analysis -- it does not count towards "how much money you have" and you don't need to decide whether going to college or not. Dec 4, 2018 at 2:59

2 Answers 2


In your 529 example, you account for the 10% penalty, but not the tax on withdrawal. The gains, $190,290 are taxed, at ordinary (not cap gain) rate. Since that's on top of your income, I'd assume 22%, at today's rates. $41,864. Canceling out the entire amount you show as extra on the 529 choice.

  • Oh, well that's horse shit. Got it, thanks for explaining the gotcha. Dec 4, 2018 at 3:05

If your purpose of saving is to provide for your child then you could use the Uniform Gift to Minors Act to invest for them as it is taxed at their level. However, when they turn 18 the money is theirs to do with what they please. Of course, you could use it for college tuition and expenses without even making them aware that it exists but if they find out, and want to, they can take control of that money.

  • 3
    The new tax code taxes the unearned income of a dependent at the rates charged to trusts. Nothing like saving for 2 decades to find the growth is taxed at a rate higher than your own regular cap gain rate. Dec 3, 2018 at 23:18
  • @JoeTaxpayer Well how about that, glad I decided to go with a 529 for my kids college savings then Dec 4, 2018 at 15:00

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