Does a 529 Plan Earn Interest?

Benefits of Investing in 529 Plans

529 plans are a popular education savings tool not only for their tax advantages, but also for their flexibility in how funds can be used. In addition to covering college tuition, fees, room and board, and other qualified expenses, 529 plans offer several expanded uses:

• Student Loan Repayment: You can use up to $10,000 per beneficiary (lifetime limit) to repay qualified student loans.
• K–12 Tuition: Up to $10,000 per year can be used to pay tuition at public, private or religious K–12 schools.

Another key benefit of 529 plans is their high contribution limits, which vary by state but often exceed $300,000. While individuals may contribute larger amounts, many stick to the annual gift tax exclusion to avoid triggering gift tax implications. In 2025, this is $19,000 per beneficiary ($38,000 for married couples).

Additionally, account holders retain full control over the funds, including the ability to adjust investments and manage withdrawals. If the original beneficiary doesn’t pursue higher education, the account owner can change the beneficiary to another eligible family member, preserving the tax advantages and keeping the funds in the family.

Types of 529 Plans

Keep in mind that there are generally two types of 529 plans, and distinguishing between them is key. College savings plans function similarly to retirement investment accounts like 401(k)s or IRAs. Contributions are invested in mutual funds, ETFs or similar investment vehicles. The value of the account can increase or decrease based on the performance of the investments chosen by the account holder.

Prepaid tuition plans, on the other hand, allow participants to purchase credits at today’s rates to be used in the future. They are typically restricted to specific colleges or university systems and may not cover all educational expenses.

How 529 Plans Earn Interest

The way a 529 plan earns interest depends on the investment options chosen by the account holder. When you open a 529 plan, you can select from a range of investment options, including mutual funds, exchange-traded funds (ETFs) and age-based portfolios. Mutual funds and ETFs invest in a diversified mix of stocks, bonds and other securities. The performance of these investments determines the growth of your 529 plan. For instance, if the mutual fund’s underlying assets perform well, the value of your 529 plan will increase, effectively earning interest.

Age-based portfolios are also a popular choice for many 529 plan holders. These portfolios automatically adjust the allocation of assets based on the beneficiary’s age. Typically, they start with a higher allocation in stocks when the beneficiary is younger, aiming for higher growth potential.

As the beneficiary approaches college age, the portfolio shifts towards more conservative investments like bonds and money market funds to reduce risk. This strategic allocation helps to maximize growth while protecting the accumulated savings as the time to use the funds approaches.

While most 529 plans are considered investment accounts, some offer FDIC-insured savings account options or certificates of deposit (CDs) for those who prefer a guaranteed rate of return. These options provide a fixed interest rate, which can allow your contributions to grow steadily over time without the risk associated with market fluctuations.

Maximizing 529 Plan Returns

Maximizing the returns on a 529 plan is crucial for ensuring you have sufficient funds to cover future education expenses while taking full advantage of the plan’s tax benefits. A 529 plan offers significant advantages, including tax-free growth and, in many cases, state-specific tax deductions or credits for contributions. However, to fully realize its potential, careful planning and strategic decision-making are essential. Here are some key steps to help you achieve this:

• Start early: The sooner you begin contributing, the more time your investments have to grow. Compounding interest can significantly boost your returns over time.
• Regular contributions: Consistent contributions, even small ones, can add up. Automate deposits to maintain steady growth.
• Choose the right plan: Different states offer various 529 plans with unique benefits and investment options. Compare plans to find the one that best suits your needs.
• Invest in low-cost funds: Opt for investment options with low fees. High fees can erode your returns over time, so selecting low-cost index funds or ETFs can help maximize growth.
• Age-based investment options: Consider age-based portfolios that automatically adjust the asset allocation as the beneficiary gets closer to college age, reducing risk as the time to use the funds approaches.
• Monitor and adjust: Regularly review your investments’ performance and make adjustments as needed to stay aligned with your goals.

By taking these steps you can maximize the growth potential of your 529 plan and ensure it effectively supports future education expenses.

How to Open a 529 Plan

Opening a 529 plan is a smart and straightforward way to save for future education expenses while enjoying valuable tax benefits. Whether you’re planning for a child, grandchild, or even your own education, these plans offer flexibility and growth potential through tax-advantaged investment options. Understanding the steps involved can help you make informed decisions and set your savings up for success.

Here are seven general steps to effectively open and manage one:

1. Research plans: Begin by researching the different 529 plans available. Each state offers its own plan, and some states provide tax benefits for residents.
2. Choose a plan: Select a plan that aligns with your savings goals, considering factors like fees, investment options, and state tax benefits.
3. Open an account: Visit the website of your chosen 529 plan. Most plans allow you to open an account online.
4. Fund the account: Decide how much to contribute initially. Many plans have low minimum contributions to get started.
5. Set up automatic contributions: Consider setting up automatic contributions to make regular saving easier.
6. Choose investments: Select from the investment options offered by the plan.
7. Monitor and adjust: Regularly review your account and adjust contributions or investments as needed.

With its tax advantages and flexibility, a 529 plan is one of the most effective tools for meeting education expenses and easing the financial burden of higher education. Start today to potentially give yourself or your loved ones the gift of financial preparedness for education.

Bottom Line

529 plans do not earn interest like a traditional savings account. However, they offer strong growth potential through a range of investment options. These tax-advantaged accounts are designed to help families save for future education expenses, making them a valuable tool for long-term planning. Setting up a 529 plan is relatively simple.

Patrick Villanova is an editor for SmartAsset, producing comprehensive personal finance content to help consumers make better decisions with their money. His particular areas of focus include retirement, financial planning and investing. Patrick studied English at the University of New Hampshire and currently holds the Certified Educator in Personal Finance (CEPF) designation. Prior to joining SmartAsset, Patrick was a senior writer at MagnifyMoney, where he covered investing. His career began in journalism and included 11+ years at The Jersey Journal, where he covered sports and news as an editor. His work has appeared on Yahoo Finance, MSN, NJ.com, and The Star-Ledger. He lives in Portland, Oregon.

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