The 10% penalty is just for earnings on the 529, not the contributions. In comparison to the regular taxable account, 529 comes with deferred tax, which in a 25% bracket breaks even with the penalty after a certain number of years, maybe 10-11 or so. If you keep money in the account for longer than that, you come ahead, even after paying the 10% penalty. So, even if you don't plan any educational expenses at all, a possible plan of action with after-tax money can be to max your Roth IRA first, then put money in 529, then in a taxable account. But this depends on your current and future tax rates, and the number of years you expect the money to stay in the account. I just do the Roth and then taxable, as my older child is 10 already, and there's very little overflow over the Roth IRA limit (most of the money goes to pre-tax accounts). Also, as others said, 529 will count against you when applying for aid, and retirement accounts won't.
