Choosing The Right 529 Plan Investments With Fidelity

A 529 plan is a tax-advantaged savings account designed to cover the beneficiary's education expenses. Fidelity-managed 529 plans offer a range of investment options, allowing you to choose an investment type that suits your specific needs. When deciding on an investment strategy, it's crucial to select a mix that aligns with your risk tolerance and financial goals. While you cannot choose individual investments, you have the flexibility to pick an investment portfolio that typically includes a blend of stocks, bonds, and short-term investments.

Fidelity's Custom Strategy for asset allocation

Firstly, you can choose between an asset mix that remains the same over time or an age-based portfolio that automatically adjusts to become more conservative as the beneficiary nears college age.

Secondly, you can choose between Fidelity Funds and Fidelity Index. Fidelity Funds use primarily actively-managed Fidelity mutual funds that attempt to beat benchmark indices, whereas Fidelity Index Funds use low-cost index mutual funds that mirror market indices.

Thirdly, you can choose from a variety of Individual Fund Portfolios, including equity, fixed income, money market, and bank deposit options.

Finally, you can choose a Bank Deposit Portfolio, which is composed exclusively of a deposit in an FDIC-insured, interest-bearing account.

When you open your account and choose the Custom Strategy, you can allocate funds in 5% increments among these options, as long as your total allocation equals 100%. The asset allocation strategy you choose should be based on your investment objectives, risk tolerance, time horizon, and other factors you determine to be important. Different asset allocations offer different balances between risk and potential returns.

Age-Based Portfolios

Fidelity Funds uses primarily actively-managed Fidelity mutual funds that attempt to beat benchmark indices. Fidelity Blend Funds uses a combination of actively-managed and index Fidelity mutual funds. Fidelity Index Funds uses low-cost index Fidelity mutual funds that mirror market indices.

The asset allocation strategy you choose for any Custom Strategy should be based on your investment objectives, risk tolerance, time horizon, and other factors you determine to be important. Different asset allocations offer different balances between risk and potential returns. Generally, the greater the stock allocation, the greater the potential for long-term returns and the greater the risk of volatility, especially over the short term. Conversely, the greater the allocation to bonds and/or short-term investments, the lower the potential for high long-term returns but the lower the short-term risks.

In-state tax benefits

When choosing investments for a 529 plan with Fidelity, it's important to consider the potential in-state tax benefits on offer. These benefits can vary from state to state, so it's worth understanding the specifics of your state's tax treatment of 529 plans.

In most states, you must contribute to your home state's plan to qualify for a state income tax benefit. This benefit can come in the form of a deduction from income or a state tax credit for 529 plan contributions when reporting income for state tax purposes. The amount you can deduct varies by state. For example, New York residents can deduct up to $5,000 annually ($10,000 if married filing jointly), while in New Mexico, South Carolina, and West Virginia, 529 plan contributions are fully deductible. It's worth noting that there is no federal income tax deduction on 529 plan contributions.

However, some states, known as tax parity states, offer a state income tax benefit for contributions to any 529 plan, not just in-state plans. These states include Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania. Additionally, some states offer a state income tax credit for 529 plan contributions instead of a deduction, such as Indiana, Oregon, Utah, and Vermont.

When considering a 529 plan, it's important to look at the bigger picture and not just focus on the potential tax benefits. Attributes such as fees, performance, investment options, and your overall financial goals should also be taken into account.

Plan management

When choosing a 529 plan, Fidelity suggests that you consider the following:

What financial services company is managing the plan and what types of services does the company offer? Fidelity-managed 529 plans all earned a best-in-class rating from Morningstar in 2024. You can choose an investment type that makes sense for your situation. Fidelity offers a range of investment options, from a Fidelity-managed, state-specific plan to the UNIQUE College Investing Plan (sponsored by the state of New Hampshire).

Fidelity also offers professionally managed portfolios that automatically adjust the asset allocation based on the beneficiary's age, potentially lowering your investment risk the closer they get to college age. Alternatively, you can select from Static or Individual Fund portfolios, which let you customize your investments.

If you prefer to manage your own asset allocations, the Custom Strategy provides the flexibility to build your own investment mix from portfolios that fall into four categories: Fidelity Funds, Fidelity Index, Individual Fund Portfolios, and Age-Based Portfolios.

The asset allocation strategy you choose should be based on your investment objectives, risk tolerance, time horizon, and other factors you deem important. Different asset allocations offer different balances between risk and potential returns.

Plan performance

When choosing investments for a 529 plan, it's important to review the plan's performance over time. Fidelity suggests reviewing 1-, 3-, 5-, and 10-year performance figures where available. This can give you a sense of how the plan has fared over both the short and long term.

Fidelity-managed 529 plans have earned strong ratings from Morningstar, a respected investment research and rating firm. In 2024, all Fidelity-managed 529 plans received a best-in-class rating from Morningstar, indicating strong performance relative to peers.

When evaluating plan performance, it's also worth considering the underlying investments within the plan. Fidelity offers various investment options within its 529 plans, including age-based portfolios and static or individual fund portfolios. Age-based portfolios automatically adjust their asset allocation to become more conservative as the beneficiary approaches college age. Static portfolios maintain the same asset mix over time, while individual fund portfolios allow you to customize your investments by selecting from various equity, fixed income, and money market options.

You can view the current performance of these portfolios on the plan performance page for your specific 529 plan. Additionally, you can access information on short-term performance, average annual total returns, and other relevant metrics.

Remember, investing involves risk, and past performance does not guarantee future results. It's important to consider your investment objectives, risk tolerance, and time horizon when evaluating the performance of any investment option within a 529 plan.

Frequently asked questions