What it is
It’s a calculator that compares the performance of a regular investment account and a 529 college savings account. It assumes a starting value ($100K), grows that over 20 years with capital gains and dividends, then determines how much cash would be available if used for qualified educational purposes, or if the money way simply taken out as a non-qualified distribution.
Why I created it
There is a lot of confusion around the value of a 529 account, and I wanted to understand whether it made sense. What I’ve found is that if you actually use the funds for educational purposes, it can offer tremendous benefit. In the example above, the 529 account has >30% more money available for education. But even if you don’t use the funds for education, you could end up coming out ahead or at least even. Yes, the government will impose an added 10% penalty on any taxable distributions that are not used toward ‘qualified expenses’. But, depending on your assumptions (future tax brackets), you might still end up with more money after tax, even when accounting for the penalty.
How you can use it
Check out the calculator. Make a copy for yourself. Tweak some of the assumptions around investment growth, current earnings, retirement earnings, and future tax jurisdictions – then see what it means for you. I think you’ll agree that if you actually plan to use it for educational expenses, then investing as early as possible and letting it grow is a great decision (of course, assuming that you’ve already maxed out other retirement investment accounts).