Key Takeaways
- 529 plans offer tax-free growth and withdrawals for qualified education expenses.
- SECURE 2.0 allows 529-to-Roth IRA rollovers up to $35,000 lifetime limit.
- Coverdell ESAs are limited to $2,000/year with income restrictions.
- HSAs offer triple tax benefits: deductible contributions, tax-free growth, tax-free withdrawals.
- 2025 HSA contribution limits are $4,300 (individual) and $8,550 (family).
- UTMA/UGMA accounts are irrevocable gifts that become the child's at majority.
- Kiddie tax applies when minor's unearned income exceeds $2,600.
- 529 beneficiaries can be changed to other family members without penalty.
Special Accounts
Several account types offer significant tax advantages for specific purposes like education and healthcare.
Education Savings Accounts
529 Plans (Qualified Tuition Programs)
529 plans are the most popular education savings vehicle, offering tax-free growth for qualified expenses.
| Feature | Details |
|---|---|
| Contributions | After-tax; state deduction may apply |
| Growth | Tax-deferred |
| Qualified withdrawals | Tax-free |
| Contribution limits | High (varies by state; typically $300,000+) |
| Income limits | None for contributions |
| Control | Account owner retains control |
Qualified Education Expenses
| Expense Category | 529 Coverage |
|---|---|
| College tuition and fees | ✓ Unlimited |
| Room and board | ✓ If enrolled at least half-time |
| Books and supplies | ✓ Required for enrollment |
| K-12 tuition | ✓ Up to $10,000/year |
| Student loan repayment | ✓ Up to $10,000 lifetime |
| Apprenticeship programs | ✓ Registered programs |
| Computer equipment | ✓ If required for enrollment |
529-to-Roth IRA Rollover (SECURE 2.0)
Starting in 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary:
| Requirement | Details |
|---|---|
| Lifetime limit | $35,000 per beneficiary |
| Annual limit | Subject to Roth IRA contribution limit ($7,000 in 2025) |
| Account age | 529 must be open at least 15 years |
| Contribution age | Contributions in last 5 years not eligible |
| Earned income | Beneficiary must have earned income ≥ rollover amount |
| Income limits | NOT subject to Roth income limits |
| Beneficiary | Must be same person as 529 beneficiary |
Key benefit: High earners normally ineligible for Roth contributions can use this strategy.
Coverdell Education Savings Account (ESA)
| Feature | Details |
|---|---|
| Contribution limit | $2,000/year per beneficiary |
| Income limits | Phase out: $95K-$110K (single), $190K-$220K (MFJ) |
| Qualified expenses | K-12 AND college expenses |
| Age limit | Must use by age 30 (unless special needs) |
| Contribution deadline | April 15 of following year |
| Investment options | Self-directed (stocks, bonds, mutual funds) |
529 vs. Coverdell Comparison
| Feature | 529 Plan | Coverdell ESA |
|---|---|---|
| Contribution limit | Very high (state-based) | $2,000/year |
| Income limits | None | Yes (phase out) |
| K-12 expenses | $10,000/year tuition only | All qualified expenses |
| Age restrictions | None | Must use by 30 |
| Investment choices | Limited options | Self-directed |
| State tax deduction | Often available | No |
Health Savings Accounts (HSAs)
HSAs offer the only "triple tax advantage" in the tax code.
The Triple Tax Advantage
- Tax-deductible contributions - Reduce taxable income
- Tax-free growth - Investment earnings not taxed
- Tax-free withdrawals - For qualified medical expenses
2025 HSA Contribution Limits
| Coverage Type | Limit |
|---|---|
| Individual (self-only) | $4,300 |
| Family | $8,550 |
| Catch-up (age 55+) | Additional $1,000 |
HSA Eligibility Requirements
To contribute to an HSA, you must:
- Be covered by a High-Deductible Health Plan (HDHP)
- NOT be covered by other non-HDHP health insurance
- NOT be enrolled in Medicare
- NOT be claimed as a dependent on someone else's tax return
2025 HDHP Requirements
| Requirement | Individual | Family |
|---|---|---|
| Minimum deductible | $1,650 | $3,300 |
| Maximum out-of-pocket | $8,300 | $16,600 |
HSA vs. FSA Comparison
| Feature | HSA | FSA |
|---|---|---|
| Rollover | Unlimited - yours forever | Use-it-or-lose-it (limited rollover) |
| Portability | Yes - stays with you | Tied to employer |
| Investment | Yes - can invest funds | No |
| HDHP required | Yes | No |
| Contribution source | Employee or employer | Employee (employer can contribute) |
HSA After Age 65
- Withdrawals for ANY purpose are penalty-free (but taxed as income if non-medical)
- Medical withdrawals remain tax-free
- Can continue to use for qualified medical expenses indefinitely
- Cannot contribute if enrolled in Medicare
UTMA/UGMA Custodial Accounts
Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) allow adults to transfer assets to minors.
| Feature | Details |
|---|---|
| Ownership | Child owns the assets (irrevocable gift) |
| Control | Custodian manages until age of majority |
| Age of majority | 18-25 depending on state and account type |
| Tax implications | Subject to kiddie tax |
| Financial aid | Counted as student asset (higher impact) |
Kiddie Tax (2025)
When a minor's unearned income exceeds thresholds:
| Unearned Income | Tax Treatment |
|---|---|
| First $1,300 | Tax-free |
| Next $1,300 | Child's tax rate |
| Above $2,600 | Parent's marginal rate |
Applies to: Children under 19, or under 24 if full-time students
UTMA vs. 529 for Education
| Factor | UTMA/UGMA | 529 Plan |
|---|---|---|
| Use of funds | Any purpose | Education only |
| Control at majority | Child takes control | Owner retains control |
| Financial aid impact | Higher (student asset) | Lower (parent asset) |
| Tax benefits | Limited | Tax-free growth for education |
| Flexibility | More flexible | Must be for education |
Exam Tip: HSAs have TRIPLE tax benefits - the only account with all three. 529-to-Roth rollovers have a $35,000 lifetime limit and require the account be open 15 years. Kiddie tax kicks in at $2,600 of unearned income.
Under SECURE 2.0, an individual can roll over 529 plan funds to a Roth IRA. Which requirement must be met?
Which account type offers a "triple tax advantage"?
A 16-year-old has $5,000 in unearned income from an UTMA account. Under the kiddie tax rules, how is this income taxed?
What is the maximum HSA contribution for a family with two parents age 56 and 58 in 2025?