There are a number of different options to help save and invest for college. The following covers four options to help make the choice for you or your family.

529 savings plan

Most states offer their own 529 savings plan. Though all plans aren’t created equal, they all share a key benefit: any earnings on your investment grow tax-advantaged and aren’t subject to federal tax when the plans’ funds are used to cover the costs of “qualified education expenses.” Qualified elementary and secondary education expenses include up to $10,000 per year per beneficiary for tuition only.  Qualified higher education expenses include tuition, fees, books, computer equipment and technology, and supplies required for enrollment or attendance at the eligible institution. Room and board are qualified expenses for students who are at least half time. The SECURE Act expanded the definition to include expenses for registered apprenticeship programs and qualified student loan repayments for a designated beneficiary or siblings (up to $10,000 lifetime each, not annual) state laws may vary. Anyone can establish a 529 savings plan for any future student, but those who have many years before the student will attend college may have more potential for tax-deferred growth. All 529 plans vary in the investment options and incentives they offer, their historical performance, management style, and fees. Though you don’t have to select the plan offered by the state you live in, there may be tax advantages to doing so. The availability of such tax or other benefits may be conditioned on meeting certain requirements; consider speaking with a tax professional for guidance on your situation.

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. Non-qualified withdrawals are subject to federal and state income tax and a 10% penalty. You can also purchase a 529 savings plan through Wells Fargo Advisors.

529 plan prepaid tuition plans

Some private schools and states also offer a different type of 529 plan called a prepaid tuition plan. Essentially, the plan allows the parent to “lock in” current tuition rates that are expected to increase. The prepaid tuition plan is exempt from federal tax, and in some cases state and local taxes. With a 529 prepaid plan, anyone can make a contribution for the beneficiary, but the plan is an asset of the account owner, not the beneficiary. If the student decides not to attend college, the plan can be transferred to another eligible beneficiary. If the child decides to attend a different college, some of the prepaid tuition balance may be applied to tuition at another school, but the student or family will be responsible for the difference.

Education savings accounts (ESA)

There are income eligibility standards that determine who can contribute to an ESA, and contributions cannot exceed $2,000 per beneficiary per year. If you qualify, funds deposited in an ESA have tax-advantaged growth potential. If the distributions do not exceed the enrolled student’s education costs, they may not be taxed either, provided the funds are used for expenses at a qualified educational institution — including private elementary, secondary schools, and post-secondary schools. If the distribution exceeds the expenses related to education, the earnings portion is subject to federal income tax and a 10% penalty unless an exception to the penalty applies (contribution amounts when withdrawn are not taxed). Unused balances can be rolled over to another eligible family member before the beneficiary is 30. Otherwise funds will be distributed as a nonqualified distribution.

Custodial account

Custodial accounts used to be a popular way to give money to a child to help pay for college expenses, but there are risks to consider. Once money is put into a custodial account for a child, it belongs to the child. The beneficiary could determine not to use the money for college once he or she turns the age that custodianship ends on the account (which could be as young as 18). A custodial account may still be used as a supplemental savings vehicle to pay for a child's expenses that may not be considered qualified if using one of the other savings vehicles. Keep in mind a significant balance in a custodial account could impact the child’s financial aid eligibility more so than the same balance in the 529 or ESA account. Earnings in these accounts above the dependent standard deduction are generally subject to “kiddie tax” laws. You can legally gift up to $15,000 to a child ($30,000 for married couples who file jointly) and not be required to pay taxes on the gift or file a gift tax return.

Though there are many investment tools designed to help prepare for the costs of higher education, their features and benefits can be very different. Do your research and start saving early to reap the most potential from whatever investment you choose.

Empower yourself with financial knowledge

We’re committed to helping with your financial success. Here you’ll find a wide range of helpful information, interactive tools, practical strategies, and more — all designed to help you increase your financial literacy and reach your financial goals.

My Financial Guide