Plans to Help Fund College for Your Family

College, while key for many careers, comes with a price tag that’s often higher than expected. According to College Board research, students paid $24,000, on average, for public colleges during the 2022-2023 school year. And it was more than $54,000 per year for a private school.¹ But there are a variety of funding options available that can help your children and grandchildren afford a higher education.

Here’s a brief rundown of education savings account types from which to choose. Your financial advisor can help you decide which is right for you and your family.

529 plan—One of the most tax-efficient types of educational savings vehicles, these plans have the potential to grow tax-deferred and distributions may be federal tax-free if used for qualified education expenses. In addition to the income tax advantages, their higher contribution limits make them especially attractive if you are concerned about estate taxes and want to reduce your eventual estate’s value.

Although 529 plans are state-sponsored, you may choose a plan offered by a state other than where you claim residency. However, your state may offer residents state-income-tax advantages that you’ll forego if you choose a different state’s plan.

Please consider the investment objectives, risks, charges, and expenses carefully before investing in a 529 college savings plan. The official statement, which contains this and other information, can be obtained by calling your Financial Advisor. Read it carefully before you invest.

Coverdell Education Savings Account (ESA)—An ESA allows contributions of up to $2,000 per child per year with similar federal income tax advantages as a 529 plan. Although these accounts have lower contribution limits and impose income eligibility restrictions, they offer more investment options than 529 plan accounts.

Custodial account—Uniform Gifts to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts allow you to give or transfer assets into a custodial account for a minor without creating a trust. The type of account available (UGMA vs. UTMA) varies by state.

Like Coverdell ESAs, UGMAs and UTMAs offer more investment options than 529 plans. But unlike both 529 plans and Coverdell ESAs, custodial accounts do not offer the same tax advantages. Custodial accounts may be subject to the “kiddie tax” rules.²

Along with the lack of tax advantages, a potential drawback of custodial accounts is your loss of control after the child reaches a specified age, typically 18 or 21, depending on the state. At this point, the child assumes full control over the account and can use the funds for anything he or she desires—including non-educational expenses.

Regardless of which funding option you choose, you’ll want to consider the potential effects of your savings on your child’s or grandchild’s eligibility for financial aid.

Before sacrificing your own financial security in the name of higher education, settle on a balanced approach to create an education savings plan.

A good first step is to talk with your children or grandchildren about your intentions and limitations. Even if these conversations start when the children are still quite young, they’ll emphasize the importance the whole family places on education.

The efforts may even trigger more conversations around money, savings, and education that often never happen. This could help children—especially teenagers—understand the importance of saving for college and taking charge of their own financial futures.

• Contact a financial advisor to discuss how a college savings plan can fit into your investment strategy.
• Find an education funding option (or options) that fits your needs and financial outlook. For more detail, see our guide to Saving for College (PDF).
• Talk to your children or grandchildren about college plans and savings.

Wells Fargo Advisors does not provide legal or tax advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.

¹ Total yearly costs for in-state tuition, fees, books, and room and board (transportation and miscellaneous expenses not included). Base is 2022-2023 school year. Costs for all future years projected by Wells Fargo Advisors in November 2022 assuming a 2.5% national average increase per year for public and a 3.0% national average increase per year for private (based on a 10-year historical average). Source: Trends in College Pricing and Student Aid. collegeboard.org

² Individuals under the age of 24 may be subject to the “kiddie tax” rules. The unearned income of an individual subject to the kiddie tax rules is taxed at the higher of the parents’ top marginal rate or the child’s tax rate.