Understanding your education savings plan

In today’s landscape, students and parents have a variety of educational choices to consider. And with education costs on the rise, families are also presented with a wide range of expense payment options – and potential challenges.

As an investor, it’s important to understand how you can effectively save for your child’s or grandchild’s future. Here are three basic steps to help you understand your education savings plan:

1. Take the time to understand your overall financial priorities,
2. Evaluate and understand your savings options, and
3. Have open and honest conversations with family members about savings and expectations.

First, get your bearings with your family and ask yourselves how many years of education your savings need to cover and what types of education you’re saving for. Outside of the traditional four- year college model, community colleges, vocational schools, or military options may fit your or your child’s goals and often operate on a shorter time span than four years. Even prior to pursuing higher education, you may also look at allocating savings to pay for day care or private education costs.

Once you get a sense of your family’s education needs and how your plan prioritizes education savings, it’s time to evaluate your payment options. Fortunately, parents and grandparents have more choices today than ever before. Whether you use funds from a savings account, credit, or cash, you’ll want to know the benefits and implications of each option as you decide how to execute your savings plan.

Your financial professional can help you choose among a variety of savings vehicles – including 529 plans, Education Savings Accounts (ESAs), and custodial accounts offered through Wells Fargo Advisors – while helping you select the right plan and investment alternatives that may fit your needs and risk tolerance.

Additionally, you as the investor should recognize how each option can be implemented and structured for use. Talk through scenarios with your financial professional: What happens if I take money out of this account early? How can I use an account if my child’s needs or education goals change? How do the earnings from this account impact matters like financial aid or taxes? Knowing the impact of these scenarios will likely be important in your decision- making process.

Besides the earnings you may accrue from a savings account, you may consider the following options for payment. By exploring all options, students and families can minimize the amount of debt they accumulate while pursuing their educational goals.

• Utilizing loans to help cover expenses. Whether you are considering federal or private loans, evaluate your financial situation to determine how much you may need to borrow, which type of loan is best for your needs, and what your ideal repayment plan looks like.
• Using personal savings to cover a portion of the expenses.
• Scholarships and grants are available to those who meet certain criteria, such as academic achievements or financial need.
• Receiving gifts, such as cash from family members or loved ones, is another viable option.

With so many choices to save for education, be sure to work with your financial professional to evaluate which one(s) may be right for your situation. This information only briefly describes some of your education savings options, and these rules can be complex. Be sure to include your tax and/or legal advisors in your discussions, as well. For more details, see IRS publication 970.

529 savings plans are available to almost anyone looking to save in a tax-advantaged account, since few restrictions apply. The 529 plan can be an appropriate choice for those looking to save a small amount on an annual/monthly basis, as well as for high-net-worth individuals aspiring to make larger gifts to prefund an education and potentially reduce their estate. The benefits of these plans include:

• Funds grow on a tax-deferred basis.
• Distributions may be federally tax-free, if used for qualified education expenses.
• In some situations, there may be state income tax benefits.
• You have flexible options if you save too much or you want to change the beneficiary to another eligible beneficiary.
• You may pay off up to $10,000 of qualified student loans.
• Beginning in 2024, 529* designated beneficiaries can make a rollover contribution from their 529 to their Roth IRA if certain conditions are met:
  • 529 must have been maintained for 15 years
  • May not exceed the aggregate of contributionsand earnings in the account more than five yearsbefore the rollover
  • May not exceed $35,000 lifetime limit
  • Are subject to annual Roth IRA contribution limits
  • The Roth IRA owner must have earned income at least equal to the amount of the rollover

Education Savings Plan (ESAs) may be an appropriate option if you are looking to save for education but may not have as much to gift. Contributions to ESAs are limited to a maximum of $2,000 per beneficiary annually, and you must be under the MAGI (modified adjusted gross income) limitation of $95,000/single taxpayer or $190,000/joint taxpayer.

• These accounts are self-directed and offer the benefits of annual tax deferral on account earnings.
• They also offer the potential for federally tax-free distributions for elementary, secondary, and post-secondary education.
• Excess funds in this account may be rolled over to another eligible family member under the age of 30 (unless they are a special needs beneficiary) or contributed to a 529 for the beneficiary or eligible family member to avoid a non-qualified distribution.

Custodial accounts may be another way to save for a child if you are interested in saving, not only for education expenses, but other items as well.

• Funds may be used for other purposes, if they are for the benefit of the child, based on state law.
• Contributions you make to this account would be subject to gifting rules, and account earnings would be subject to kiddie tax rules annually.
• Since gifts to these accounts are irrevocable and may end up in the child’s hands when the age of custodianship ends, you may want to be thoughtful about how much to save in these accounts.

In 2023, Wells Fargo conducted a survey of over 1,000 individuals aged 50 or over with investable assets of at least $1 million. According to that study, 90% of respondents say they have wisdom to share with younger generations, yet fewer than half of the respondents say their children know how much money they have – and even fewer have had a family meeting to discuss money with their children.*

We suggest setting time aside for a meeting in which all family members can discuss financial goals and share logistics around education savings. Encourage everyone – including children – to share their thoughts and feelings about money and to listen without judgment.

In these conversations, set clear expectations for everyone involved. What portion of education costs is being provided by the guardian? What costs, if any, are the child expected to pay for? And how will they pay for them? Did another family member, such as a grandparent, express that they will help pay for education costs? Make sure everyone is on the same page and that there are no assumptions. And don’t forget to revisit expectations often, as needs and circumstances change.

Finally, share your goals and evaluate your education savings plan with your financial professional. They can help connect you with more meaningful financial resources or tools to aid in the planning process and advise how to pivot when life changes happen.

Schedule an education planning conversation and share your savings goals with your family today.
Talking about money openly and honestly can help create a shared understanding of your family’s finances and help build a foundation for your children to think healthily and critically about their money as they pursue their education.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.

*Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 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. The availability of such tax or other benefits may be conditioned on meeting certain requirements.