Every Objection to 529 Plans Is Fair. Savvy Investors Fund Them Anyway.

Most of the objections to 529 plans, relative to just using a brokerage account, are good ones. Because we still believe wholeheartedly in these accounts, those objections don't always get a fair hearing. So we're going to give them a proper beat-down, and then immediately pick them up, dust them off, and tell everyone we're still friends.

The Case Against 529 Plans

1. What happens if you need the money for something other than school?

The money is locked up tight. Take money out for anything that isn't education and you owe ordinary income tax on the gains plus a 10% penalty for good measure. You only get the more favorable capital gains rate if that money was sitting in a brokerage account instead.

2. What if your three-year-old never actually goes to college?

I know this is groundbreaking news, but kids change quite a bit. Higher education might not be in the cards by the time they turn 18. Plus, there aren't many three-year-olds out there talking with great conviction about the merits of a liberal arts education (if yours is, good luck). This is the objection that stops many people from funding a 529 in the first place, and reasonably so.

3. How about those investment options?

The investment options aren’t always thrilling, to say the least. If you're lucky enough to get a state income tax break for contributing, you might be stuck using a 529 platform with an underwhelming menu. You get whatever lineup the 529 administrator managed to negotiate. Age-based glide paths built for a "typical" family and high expense ratios could also come standard. A brokerage account, by contrast, gives you thousands of options, many with historically low fees.

4. So why not just use a regular brokerage account instead?

Gains in a brokerage account (assuming long-term) are taxed between 0% and 20%. You can also use tax-loss harvesting to offset some of that. And there's no one telling you how you can or can't spend the money. If the child never goes to school, you can go buy a boat!

5. Is the state tax deduction even worth chasing?

Not particularly. The state deduction is a big motivator for some people, yet most won't see more than a few hundred dollars in savings; hardly enough to change the course of a savings strategy that spans many years and many thousands of dollars.

That's all true. Every word. Not a single blow was off target.

Why We Still Recommend 529 Plans

Many readers already know the traditional reasons to fund a 529. So let’s hit some of the newer ones and those often overlooked.

You can now move unused 529 funds into a Roth IRA

The SECURE Act 2.0 opened a path from a 529 into the beneficiary's Roth IRA. You can move up to $35,000 out of a 529 and into a Roth IRA for the beneficiary. As long as you follow the rules, it’s tax and penalty-free. This is a meaningful answer to the "what if they don't go to college?" problem.

The list of qualified "education expenses" grew substantially 

The One Big Beautiful Bill Act expanded what counts as a qualifying expense. Starting in 2026, the K-12 withdrawal limit doubles to $20,000 per beneficiary, and qualifying expenses now extend beyond tuition to curriculum materials, tutoring, testing fees, dual enrollment, and educational therapies. A whole list of postsecondary credentialing programs are covered, too. 

529 funds can pay down student loans

If the beneficiary has outstanding student loans, up to $10,000 can be used to pay off that debt. This often occurs when the original beneficiary has graduated, and the 529 owner changes the beneficiary to a family member who may have needed to take out loans to pay for college. 

Beneficiary changes to family members escape penalty and income tax

Changing the designated beneficiary to another member of the family triggers no income tax  and no 10% penalty. Funds distributed from a 529 also aren't taxable if rolled over to another plan for the same beneficiary, or for a member of that beneficiary's family.

The Verdict

Fund it. Don't overfund it. We truly believe every client situation is unique, so we’re not going to give exact funding levels that apply universally. The advice should always be tailored to the individual or family, so this is as prescriptive as we’ll get.

Disclosures:

For complete list of disclosures, view Insights Disclosures.