Vanguard exposes the account costing parents $25K
Vanguard highlights a common college savings mistake: the account you choose can cost or save thousands over time. In a recent comparison, the firm modeled 18 years of contributions in a 529 plan versus a taxable brokerage account and found a gap of about $25,000.
The difference is driven by how each account is taxed along the way. While both can hold similar portfolios, one allows earnings to compound without annual tax drag, while the other reduces returns through ongoing taxes on gains and dividends. With college costs continuing to climb, that structural difference has a measurable impact by the time tuition bills come due.
How a taxable brokerage account erases $25,000 of your child's college fund
Vanguard modeled a family contributing $3,000 per year for 18 years at a 6% average annual return in two account types. A 529 plan produced a balance of $103,453, while the same contributions in a taxable investment account grew to only $77,790, according to Vanguard's education savings comparison.
That $25,663 gap exists because of one structural difference: how each account type handles taxes on your investment returns. In a 529, gains grow tax-deferred, and qualified withdrawals are federally tax-free. In a taxable brokerage account, you owe capital gains and income taxes every year on dividends and realized gains, which reduces the amount available to compound.
"You can think of a 529 account like a Roth IRA account, except it's for education purposes instead of retirement. You can save money by not paying taxes on your earnings, and when you withdraw it for qualified education expenses like tuition and textbooks," said Andrew Wang, Financial Advisor and Managing Partner, Runnymede Capital Management.
The firm's model assumes a 22% federal income tax rate, a 5% state income tax rate, and a combined 20% capital gains rate at liquidation. Those rates reflect what a typical middle-income household would face over an 18-year savings period, not an extreme or unusual scenario.
The tax drag builds slowly, but the damage is permanent
The $25,000 gap does not appear overnight, and that is precisely what makes a taxable brokerage account a bad fit for college savings. In the first five years of saving, the difference between the two accounts is modest because the balances are still relatively small.
The damage accelerates in years 10 through 18, when the account balances are large enough for annual tax payments to meaningfully reduce your compounding base. Each year, the taxable account pays a portion of its growth to the IRS. That payment permanently removes capital that would have continued compounding for the remainder of your child's growing-up years.
By year 18, the cumulative effect of annual taxes on dividends and capital gains distributions has removed more than $25,000 from your child's education fund. This is money that could cover more than four full semesters of in-state tuition at the average public university, based on the College Board's published figures for 2025-2026.
Financial aid formulas punish the wrong account type even further
The $25,000 tax gap is not the only cost of choosing a taxable account over a 529 for your child's education fund. Financial aid formulas treat different account types very differently, which can reduce your child's eligibility by thousands of dollars. Parent-owned 529 plans are assessed at a maximum of 5.64% of the account value for federal financial aid calculations.
A taxable brokerage account held in the parent's name faces the same 5.64% rate, but the similarity ends there. Any investment gains realized inside a taxable account show up as income on the FAFSA, which can further reduce your child's aid package. The 529 avoids this entirely because qualified withdrawals are not counted as income in the formula.
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According to Vanguard, if you make the additional mistake of putting the brokerage account in your child's name through a UGMA or UTMA, the damage multiplies significantly. Student-owned assets are assessed at up to 20%, meaning a $60,000 balance could reduce financial aid eligibility by up to $12,000 in the first year alone.
Grandparent-owned 529 plans offer an even stronger position because those assets generally do not appear in financial aid calculations at all. If your parents or in-laws want to contribute to your child's education, having them use a 529 is strategically superior to gifting cash into a taxable account.
What college savings experts recommend you do with this information
"Every dollar you save is a dollar less you'll have to borrow," Mark Kantrowitz, a student financial aid expert and publisher at Saving for College, told CNBC Select. "Every dollar you borrow will cost about two dollars by the time you repay the debt."
Kantrowitz uses a benchmarking formula he calls the "one-third rule" to help families assess whether they are on track. Multiply your child's current age by $3,000 for in-state public tuition, by $6,000 for out-of-state public, and by $8,000 for a private university. If your total falls short of that target, the gap represents how much additional saving or borrowing you will likely need.
The report recommends families start by checking whether their state offers a tax deduction or credit for 529 contributions, since nearly 40 states provide some form of state tax benefit. It also suggests selecting a target enrollment portfolio that automatically adjusts the stock-and-bond mix as your child approaches college, eliminating the need for manual rebalancing over 18 years.
"Procrastination is a common mistake," Kantrowitz has also noted, pointing out that only 18% of children under age 18 currently have 529 plans. "Sticker shock often leads to savings paralysis," he said, adding that families should focus on getting started rather than worrying about whether they can save enough to cover the full sticker price of a four-year degree.
What happens if your child does not go to college
A common objection to opening a 529 is the fear that the money will be trapped if your child skips college. In practice, 529 plans can be used at any college, university, vocational school, or other postsecondary institution eligible to participate in a federal student aid program according to the IRS.
If the original beneficiary does not need the money at all, the account owner can change the beneficiary to another qualifying family member either a sibling, parent, niece, nephew, or even a future grandchild without taxes or penalties.
Under the SECURE 2.0 Act, beneficiaries can also roll over up to $35,000 in unused 529 funds into a Roth IRA in their name, subject to annual Roth contribution limits and the requirement that the account has been open for at least 15 years according to the IRS.
The account never expires, so there is no deadline to decide. As a last resort, non-qualified withdrawals are subject to income tax and a 10% federal penalty on the earnings portion only your original contributions are never taxed or penalized according to Saving For College.
The flexibility of a 529 means that choosing one over a taxable account does not require you to bet your child's entire future on a traditional college path.
Next steps for parents still using a taxable account
The analysis reduces this decision to simple arithmetic: a taxable brokerage account costs your family more than $25,000 over 18 years, compared with a 529 plan holding the same investments. The 529 offers tax-free growth, tax-free qualified withdrawals, and a lighter touch on financial aid eligibility. No taxable account can replicate that combination for education savings.
Vanguard's analysis suggests that families currently saving in a standard brokerage account still have time to recapture the compounding advantage by switching to a 529, but only if they act before more months of tax drag quietly reduce what their child will have when the first tuition bill arrives. The firm notes that the best time to open a 529 was the day a child was born, but the second-best time is now.
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This story was originally published April 26, 2026 at 6:47 AM.