Starting early makes a difference
Investor 1 starts saving and investing $3,000 annually in a 529 when their child is born.
Investor 2 starts saving and investing $3,000 annually in a 529 when their child is 10 years old. To end up with as much as Investor 1, Investor 2 would need to save about $6,700 a year.
| Years contributed | Annual savings | Accumulated balance | |
| Investor 1 | 18 | $3,000 | $88,617 |
| Investor 2 | 10 | $3,000 | $39,620 |
This hypothetical example assumes the following: (1) annual 529 contributions on January 1 of each year for the number of years shown with no withdrawals through year 18, (2) annual $3,000 contribution, (3) an annual nominal rate of return of 5%, and (4) no taxes on any earnings. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Past performance is no guarantee of future results.
Contributions to a 529 are made after-tax, and earnings can be withdrawn tax- and penalty-free when used for qualified education purposes.4 While there is no tax deduction at the federal level for contributions, some states do let you deduct contributions to 529 plans from your income subject to state income tax.
When not used for qualified education expenses, withdrawals of earnings are subject to a 10% penalty and taxes. Contributions are made with after-tax money and are not penalized if withdrawn. Read Fidelity Viewpoints: The ABCs of 529 savings plans
The prospect of potentially being penalized for not using all the money in the account may have given some parents pause before committing to a 529. But keep the following in mind:
- The beneficiary on the account can be changed to a family member of the original beneficiary.
- Under certain conditions you may be eligible to roll over assets from your 529 to a Roth IRA established for the beneficiary of the 529 account.5
The law now allows for up to a lifetime limit of $35,000 to be rolled over to a Roth IRA—the rollovers are subject to the annual Roth IRA contribution limit.
Please consult a qualified financial or tax professional regarding your specific circumstances before making any investment decision. You may have a gain or loss when you transfer your 529 assets.
Read Fidelity Viewpoints: How unused 529 assets can help with retirement planning
