529 college savings
A 529 plan has no federal deduction, so the entire benefit is the tax-free growth — and the 10% penalty that waits if the money is not used for education. This projects the balance to enrolment, prices the state deduction, and shows what a non-qualified withdrawal would actually cost.
| Year | Balance | Contributed | Growth | State saving |
|---|---|---|---|---|
| 1 | $16,600 | $6,000 | $600.00 | $250.00 |
| 2 | $23,596 | $12,000 | $1,596 | $250.00 |
| 3 | $31,012 | $18,000 | $3,012 | $250.00 |
| 4 | $38,872 | $24,000 | $4,872 | $250.00 |
| 5 | $47,205 | $30,000 | $7,205 | $250.00 |
| 6 | $56,037 | $36,000 | $10,037 | $250.00 |
| 7 | $65,399 | $42,000 | $13,399 | $250.00 |
| 8 | $75,323 | $48,000 | $17,323 | $250.00 |
| 9 | $85,843 | $54,000 | $21,843 | $250.00 |
| 10 | $96,993 | $60,000 | $26,993 | $250.00 |
| 11 | $108,813 | $66,000 | $32,813 | $250.00 |
| 12 | $121,342 | $72,000 | $39,342 | $250.00 |
A 529 has no federal contribution limit, but most plans cap total balances around $235,000. Contributions are after-tax federally; the state deduction is the only tax break on the way in.
B_n = B₀(1 + r)ⁿ + c·((1 + r)ⁿ − 1)/r · Annual contributions, annual compounding.
min(c, cap) × state rate · The deduction is per taxpayer per year and does not carry forward.
tax = earnings × (t + 10%) · Only the earnings are taxed; contributions come back tax-free.
B_tax = B₀(1 + r − drag)ⁿ + … · The drag is the annual tax on dividends and realised gains.
A clear path from inputs to results.
A 529 plan has no federal deduction, so the entire benefit is tax-free growth — and a 10% penalty on the earnings if the money is not used for education. This projects the balance to enrolment, prices the state deduction, and shows what a non-qualified withdrawal would actually cost.
How to use
- Enter the balance you hold today and the annual contribution.
- Set the return you expect and the years until the beneficiary enrols.
- Add the state deduction and its annual cap, if your state offers one.
- Choose what share of the balance will be spent on qualified education.
- Read the balance, the tax-free growth and the after-tax value.
The formula
Reference: IRC §529 for qualified tuition programmes; the 10% additional tax is in §529(c)(6). State deductions follow each state's own statute.
Worked example
$10,000 today plus $6,000 a year for twelve years
- Balance $10,000, contribution $6,000 a year.
- 6% return, 12 years to enrolment.
- 5% state deduction capped at $5,000, 22% federal rate.
- 90% of the balance spent on qualified education.
- 1
Twelve years of contributions add $72,000 to the $10,000 already there.
- 2
Compounded at 6%, the balance reaches $125,583, so $43,583 is growth.
- 3
The $5,000 of deductible contributions saves 5% — $250 a year, $3,000 over the period.
- 4
Spending 90% on education leaves 10% of the earnings, $4,358, exposed to tax.
- 5
That exposure costs 22% income tax plus the 10% additional tax: $1,395.
- 6
The after-tax value is $124,188 against $116,580 for the same plan in a taxable account.
$125,583 balance · $43,583 tax-free growth · $3,000 state saving · $124,188 after tax.
Interpreting the result
The state deduction is a small, immediate return; the federal tax-free growth is the real benefit and it scales with time. A plan started at birth has eighteen years of compounding, one started at eight has ten — and that difference is larger than any change most families can make to the annual contribution.
Assumptions & limitations
- Contributions are after-tax federally; the state deduction is applied up to its annual cap and does not carry forward.
- Growth is a constant nominal return with annual contributions.
- The taxable comparison uses the same return less a constant annual drag for tax on dividends and realised gains.
- Qualified withdrawals are tax-free; non-qualified withdrawals pay income tax plus a 10% additional tax on the earnings only.
- The plan's aggregate balance cap and any gift-tax consequences are not modelled.
Frequently asked questions
What counts as a qualified expense?
Tuition, fees, books, supplies, equipment and computers, plus room and board up to the school's cost-of-attendance allowance. K-12 tuition up to $10,000 a year is also qualified, and apprenticeship programmes and student loan repayment up to $10,000 qualify under recent changes.
Does the beneficiary have to be my child?
No. Any family member — a sibling, a niece, a grandchild, or yourself — can be the beneficiary, and the beneficiary can be changed later as long as the new one is a qualifying family member.
Does it affect financial aid?
Yes. A parent-owned 529 counts as a parental asset on the FAFSA, which is assessed at a much lower rate than student income. A grandparent-owned plan used to be invisible until distribution; the FAFSA simplification now treats grandparent distributions as student income in the year received.
What if the child does not go to college?
The beneficiary can be changed to another family member without tax, the money can be used for apprenticeships or K-12 tuition, and up to the annual Roth IRA limit can roll over after the account has been open fifteen years. Only money that leaves the system entirely pays the penalty.
How much should I contribute?
Work backwards from the cost of attendance, not from the contribution limit. Overfunding is recoverable but awkward; underfunding is usually fine, because student loans and current income can cover a gap that a tax-free decade cannot create.
Methodology last reviewed 2026-10-21. Results are informational and not financial or engineering advice — see our disclaimer.