Rate of return question

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?

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.

• 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 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) Jun 15, 2022 at 22:05
• 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 Jun 15, 2022 at 22:08