This post may contain affiliate links and Corporette® may earn commissions for purchases made through links in this post. As an Amazon Associate, I earn from qualifying purchases.
Back in January — inspired by a Mint article — we took a look at tax-savvy investment vehicles such as 401Ks and IRAs. Today, let’s look at some of the other tax-friendly ways to save, such as 529s and Health Savings Accounts (HSAs). Just as a reminder — according to the article, “The Value of Tax-Deferred Savings.” “[u]nless you make enough money to max out all of your tax-advantaged accounts (401(k), IRA, 529, HSA, and the like), it rarely makes sense to do any investing outside them.” (Please note, I am not a financial adviser — this is all just my personal knowledge, so take it with a grain of salt.)
(Pictured: PS1 Wallet, available in 8 colors at ProenzaSchouler.com for $165.)
Like we did before, let’s go through the main questions on everyone’s mind…
- What’s the advantage?
- How much can you put into it?
- Who can use it?
- Can you use it to put a downpayment on a house, or pay for something else big (wedding, car, schooling, etc)?
- When can you take it out?
529 Plans
- What’s the advantage?
There are two types of 529 plans: pre-paid tuition plans and college savings plans; every state has at least one type of plan. College saving plans allow you to establish an account for a beneficiary; depending on which state’s 529 plan you choose you have different options for investments. (For example, my husband and I recently opened a 529 plan in New York State for our son. The NY plan is managed by Vanguard, so there are a ton of investing options, including many index funds.)
Withdrawals from college savings plans can “generally be used at any college or university.”
Tax benefits really depend on which state you’re in (as well as which state’s plan you’re investing in). Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses (tuition, room and board, even books sometimes).
In some states, if you’re a resident of the state, you get an additional state tax deduction — for example, NY taxpayers investing in the NY Direct Plan can deduct up to $5,000 ($10,000 for married couples filing jointly) from their state taxes (but not their federal taxes).
Other states may offer matching grants, and a few even allow state tax deductions if you contribute to any 529 plan.
- How much can you put into it?
It depends on the state; I would recommend focusing on how much you can put in and still get the state tax deduction. For NY, for example, you can put more than $10K in per year — but it doesn’t make sense to (particularly because you have to pay gift taxes after you hit $13K).
- Who can use it?
Anyone can open a 529 plan, even people without children. Because you can change the “beneficiary” once a year, you can begin saving before you have children, or even save for yourself if you plan on going back to school.
- Can you use it to put a downpayment on a house, or pay for something else big (wedding, car, schooling, etc)?
If you withdraw money from a 529 plan and do not use it on “eligible college expenses,” you generally will be subject to income tax and an additional 10% federal tax penalty on earnings.
- When can you take it out?
This depends on the state and the plan — most do not require a minimum holding period.
Health Saving Plans
- What’s the advantage?
A Health Savings Account allows people in high-deductible medical plans to save money for medical expenses in a tax-preferred way by claiming a tax deduction for contributions you make to your HSA. The contributions remain in your account from year to year until you use them, and the interest and other earnings on the assets in the account are tax free.
- How much can you put into it?
In 2012, you can contribute up to $3100 if you’re a single, or $6,250 for families.
- Who can use it?
You only qualify for an HSA if you are covered under a “high deductible health plan,” described in 2012 as having a minimum annual deductible (for self) of $1200 or (for family coverage) of $2400. (Full disclosure: I don’t have an HSA, but realized in writing this post that my family and I may qualify for one — my insurance plan (Oxford) has a whole little section on its website for HSAs, including how to open an account.)
- Can you use it to put a downpayment on a house, or pay for something else big (wedding, car, schooling, etc)?
Not really: If you receive distributions from your HSA for reasons other than qualified medical expenses, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax.
- When can you take it out?
When you pay medical expenses during the year that are not reimbursed by your insurance plan (such as because you haven’t hit the deductible limit), you can ask the trustee of your HSA to send you a distribution from your HSA. You do not need to take it out every year, and the HSA can go with you when you switch jobs.
Readers, do you have HSAs or 529 plans? How have they worked out for you?
