Does a 529 Plan Earn Interest?

Unlike a traditional savings account that earns interest, a 529 plan grows based on the performance of the investments you select within the plan. Most 529 plans offer a range of investment options, such as mutual funds or age-based portfolios, which are designed to grow over time through market appreciation. So while the account itself doesn’t earn interest in the conventional sense, the investments inside the plan can increase in value.

A financial advisor can help you set financial goals and create a plan to save for them.

What Is a 529 Plan?

A 529 plan is a tax-advantaged account designed to encourage saving for future education costs. Named after Section 529 of the Internal Revenue Code, these plans offer significant tax benefits. Contributions are made with after-tax dollars, but the earnings grow tax-deferred. Withdrawals are also tax-free when used for qualified education expenses, which include tuition, fees, books, and room and board. This makes 529 plans an attractive option for parents and guardians looking to fund their children’s education.

While a 529 plan’s investment growth is not subject to federal taxes, many states also offer tax deductions or credits for contributions to their state’s 529 plans. This tax treatment can result in substantial savings compared to taxable investment accounts.

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.

A financial advisor can help you determine how a 529 plan fits into your investment strategy.

Types of 529 Plans

A 529 plan is a tax-advantaged investment vehicle used to save for qualified education expenses.

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:

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

Starting early and contributing often can help maximize the returns of a 529 plan.

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. Working with a financial advisor can also help ensure the account is structured to align with your goals.

Education Planning Tips

A financial advisor can help you plan and save for your children’s education needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
While 529 plans are subject to the annual gift tax exclusion limit, families can choose to make five years’ worth of contributions at once. This approach, known as “superfunding,” accelerates the potential compound interest that the account can generate, leading to bigger balances. However, J.P. Morgan found that super funding can result in leftover funds, which may be treated as taxable income if you don’t have another beneficiary in the same generation to transfer it to.