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But why contribute post tax to pay a 10% penalty (that money was already taxed) if education is not in the cards for the child?
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Your investments in a taxable account are also post-tax, btw.
Just for grins, let's assume you could put $1000 in a taxable account and $1000 in a 529 today, and both funds grow at 12% (just to make the math easy.) In 18 years your money has doubled 3 times, to $8000 (an interest calculator says it's actually $7689.97). Let's assume your child does not go to college.
In the taxable fund, you pay 15% on the capital gains each year. I ran a quick spreadsheet to sum up the annual gains. Total tax paid: $1003
In the 529, you pay a 10% penalty. Total penalty paid: $769
The 529 comes out slightly ahead, even if your child doesn't go to college. If he does, you've saved $1000 in taxes.
Of course, this is for a lump sum contribution -- the numbers may work out differently for annual contributions.