Do 401(k) Savings Earn Interest?

If you invest them in something generating interest income, they do

While there are a wide array of investment accounts available to investors, one of the most common for employees is the 401(k). This account, which is the hallmark of the defined contribution retirement plans that most employers provide, allows investors to make retirement contributions on a tax-deferred basis and direct the investment of those funds.

Key Takeaways

  • 401(k) plans do provide interest-bearing options in the securities in which they invest funds.
  • Interest-bearing options in a 401(k) include CDs, money market funds, U.S. treasury bonds, and corporate bonds. 
  • Many employers offer matching funds to their employees' 401(k) accounts, which essentially is free money for the fund.

Though the range of investment options available in a 401(k) varies from plan to plan, there is nearly always an interest-bearing option available. The following are some of the most common types of securities that generate interest income for 401(k) owners.

Types of Investment Accounts

Certificates of Deposit

These securities, frequently referred to as CDs, are issued by commercial banks and pay a preset rate of interest over the term of the agreement. The Federal Deposit Insurance Corporation (FDIC) often acts as a guarantor of these securities, which makes them quite attractive to low-risk investors.

Money Market Funds

These funds seek to generate returns by investing in short-term securities, generally those with terms of less than one year, that relate to the money market at large. While returns from money market funds can involve an element of capital gain, proceeds from earned interest are the primary component.

401(k) plans do provide interest-bearing options in the securities in which they invest funds.

U.S. Treasury Bonds

Long regarded as one of the safest investments in the world, U.S. Treasury bonds (T-bonds) provide investors with recurring, semiannual interest income through direct ownership or a mutual fund. It is worth noting, however, that investors only earn a bond’s yield to maturity if the bond is actually held through to maturity.

Corporate Bonds

Like U.S. T-bonds, corporate bonds provide investors with recurring interest income. However, the default risk associated with corporate bonds varies significantly by the issuer. Because of this, investors need to conduct a thorough review of any corporate bond security prior to investing directly or through a mutual fund.

Stable Value Funds

Stable value funds are low-risk investments that provide a steady return. Similar to money market funds, these funds invest in guaranteed investment contracts (GICs) issued by insurance companies.

Advantages of an Intertest-Bearing 401(k) Account

The maximum contribution an individual can make to their 401(k) account in 2021 is $19,500 (rising to $20,500 in 2022). Those 50 and older can add an additional $6,500 for both years. If your employer offers even a 1% match on your contribution, that can mean substantial growth in the long-term thanks to compound interest. The gains you see are interest gains on interest and are considered the gold standard of responsible and intelligent investing.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Federal Deposit Insurance Corporation. "Are My Deposit Accounts Insured by the FDIC?"

  2. TreasuryDirect. "Treasury Bonds: Rates & Terms."

  3. Internal Revenue Service. "IRS Announces 401(k) Limit Increases to $20,500."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description