Fidelity reveals little-known benefits of 529 college savings plans
Data from Fidelity Investments show that roughly two-thirds of parents call education savings a top priority for their households.
Yet many of those same families channel their money into regular savings or brokerage accounts rather than opening a dedicated 529 plan, the firm found.
The reason is a specific fear that Fidelity's research has now put numbers behind, and it may no longer hold up under current federal law.
Federal legislation over the past two years has broadened the uses of 529 plans beyond traditional four-year colleges and created a link to retirement savings.
The change reduces risk for parents and grandparents who previously avoided these accounts over concerns that their money could get trapped.
Fidelity survey quantifies the fear keeping families away from 529 plans
About 26% of parents who do not use a 529 told Fidelity they worry their child will skip college and leave the dedicated savings stranded.
That fear was sharper among parents who have not started saving at all, with 38% citing uncertainty about their child's educational path, according to Fidelity.
Around 16% of grandparents in the same survey reported similar concerns about contributing to an account their grandchild may never fully use, Fidelity noted.
529 plans have become more flexible over time, but that flexibility can also create confusion if families don't fully understand how to use them.
The pattern points to a psychological barrier strong enough to override the concrete tax advantages 529 plans offer, even as tuition outpaces inflation.
A separate 2026 Edward Jones and Morning Consult survey found that only one-third of adults can correctly identify a 529 plan's primary purpose.
Recent legislation expands 529 uses far beyond the traditional college path
Federal law has broadened the list of qualified 529 expenses multiple times in recent years, and the pace of those changes has accelerated significantly.
The SECURE 2.0 Act introduced Roth IRA rollovers from 529 accounts, and the One Big Beautiful Bill Act, signed in July 2025, expanded grade K-12 withdrawal caps and broadened qualifying expenses.
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Starting in 2026, families can withdraw up to $20,000 per year from a 529 for elementary, middle, or high school tuition, books, supplies, and equipment.
That figure doubles the previous $10,000 annual cap for K-12 expenses, giving parents more room to tap the funds earlier.
Expanded 529 qualified uses under current law
- K-12 tuition, books, supplies, and equipment: Up to $20,000 per year starting in 2026, according to Fidelity
- Student loan repayment: Up to a $10,000 lifetime limit per individual beneficiary or sibling, Fidelity indicated
- Roth IRA rollover: Up to a $35,000 lifetime, subject to a 15-year account age requirement and annual Roth contribution caps
- Apprenticeship and credentialing programs: Recognized postsecondary programs newly covered under the One Big Beautiful Bill Act
Source: Fidelity's surprising benefits of 529 plans
Those expanded options target the concern that Fidelity's survey identified as the central reason many families refuse to open these accounts.
How unused 529 money can convert into retirement savings under SECURE 2.0
Under the SECURE 2.0 Act, families can transfer unused 529 funds into a Roth IRA in the beneficiary's name without taxes or penalties.
Fidelity noted that the lifetime cap for this rollover stands at $35,000, and annual transfers are limited to the Roth IRA contribution ceiling. For 2026, that annual limit is $7,500, which means a full $35,000 rollover would take at least five years to complete.
The 529 account must have been open for at least 15 years before any rollover can take place, Fidelity reported. Transferred contributions must also have been in the plan for at least 5 years before the rollover date, the firm noted.
Families also retain the option to change the 529 beneficiary to an eligible family member, such as a sibling, stepchild, or parent, without incurring taxes.
Parent-owned 529 assets carry a financial aid advantage that many families overlook, which is factored into federal financial aid formulas at a maximum rate of 5.6%, Fidelity reported in a related Smart Money article.
Student-owned assets in custodial accounts created under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), in contrast, can be assessed at rates as high as 20%, Fidelity indicated.
Fidelity's formula for families who feel they cannot afford to start saving
Competing obligations are the biggest factor for families who want to save but have not yet opened a 529, according to Fidelity's data. About 62% of parents who had not started saving in any account type told the firm they have more pressing financial obligations.
Michael Rusinak, vice president of Financial Solutions at Fidelity, said families aiming to cover half of a four-year education can follow a targeted formula.
He recommended saving 10% of a given school's current annual cost each year, starting from when a child is born.
At the national average of roughly $30,000 per year for in-state public college, that works out to about $250 per month, Rusinak noted in the Fidelity report.
"Starting to save early is another thing you can do in order to take some stress off of other financial goals," Rusinak said. "Even if you don't have much to save early on, you can get yourself set up better by giving your investments time to potentially grow."
The 2026 gift tax exclusion allows individuals to contribute up to $19,000 per beneficiary without reporting the gift to the Internal Revenue Service.
Married couples filing jointly can double that to $38,000, and a superfunding strategy lets families front-load up to five years of gifts, Fidelity noted.
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This story was originally published June 8, 2026 at 5:33 AM.