Understanding Tax Differences
Understanding qualified tax-free growth–a major benefit of 529 accounts.
Money invested in 529 plans grows federal and state tax-deferred, and withdrawals are not subject to federal capital gains taxes when used for qualified expenses.
Dan and Susie earn $100,000 in yearly adjusted gross income and have contributed to a 529 plan for several years. They live in Arizona, paying a state tax rate of 2.5%. By the time their beneficiary son withdraws the funds for a trade school, the account has generated $30,000 in non-taxable (0% on qualified expenses) investment gains.
If those assets were held in their taxable account then handed to their son, the couple would owe $4,500 in federal taxes on the gain at the 15% long-term capital gains rate attached to married couples filing jointly with incomes over $98,900 in 2026. They would owe further $750 state tax to Arizona–total loss near $5,250.
A Trump 530A account for the son gaining $30,000 tax deferred would be taxed at his federal income rates which for this example would likely be 12%--or $3,600, a 10% early withdrawal penalty on earnings (as well as potentially some of the principle)—at least $300, and the added $750 state tax–total near $4,700 loss.
No statement or example on this site should be considered a specific recommendation for your personal situation. Investing and tax strategies each carry significant risks. Examples herein may not apply to your situation. Please consult your estate attorney, tax advisor, or financial advisor for personal advice.