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I have a question regarding rate of return and if it earns more quickly in a larger investment account. Let's assume a rate of return of 7% and $20,000 to invest. Options are to start a new 529 account with the $20,000 or adding to an existing 529 account with a current balance of $50,000.

New 529 - fund with $20,000:

  • Year 1: $20,000 x .07 = $1,400 gain
  • Year 2: 21,400 x .07 = $1,489 gain
  • Gain in 2 years: $2,889

vs. add to existing $50k 529:

  • Year 1: ($20k + $50k) x .07 = $4,900.
  • Year 2: $74,900 x .07 = $5,243.
  • Gain in 2 years: $10,143

Better to add the $20,000 to the larger 529?

Thought being since the beneficiary can be changed, would this allow higher gains in the account and allowing for more growth potential?

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What you're missing is that the existing $50k would grow by 7% in the first scenario too (assuming the same investments), so the actual result would be:

Year 1: $20,000 x .07 = $1,400 gain + $50,000 * .07 = $3,500 gain

Year 2: 21,400 x .07 = $1,498 gain + $53,500 * .07 = $3,745 gain

So your total gain between the two accounts would be $2,898 + $7,245 = $10,143 - exactly the same as the second scenario.

So there's no monetary benefit of contributing to a new vs existing 529 plan - the benefits would be the choice of beneficiaries, which as you pointed out could be changed - or you could do a partial rollover if you ended up with multiple students you wanted to provide for. You could also have different age-appropriate investments in the separate accounts.

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    There are potentially some minuscule differences stemming from transaction fees but that's not, in my opinion, worth factoring in, especially compared to other factors
    – Kevin
    Jun 15, 2022 at 21:50
  • True, but those fees would get applied to only the $20k in either case, so it still should be the same (unless you're saying that the fees would be different for one account vs two)
    – D Stanley
    Jun 15, 2022 at 22:05
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    Simple example would be if you wanted to sell everything and there was a flat $50 transaction fee to sell. One way would cost you $50. The other would cost you $100
    – Kevin
    Jun 15, 2022 at 22:08

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