Tyler Conley, MBA, CFP®, CEPA®, Financial Planner
February 17, 2023
“What are eligible expenses for my 529 College Savings Plans and HSA (health savings account)?” is a common question I receive when meeting with clients. Many of these questions could be attributed to years of ambiguity and limited practicality for both types of accounts. Although these accounts were created with the best of intentions to incentivize Americans to save, their application/utilization was far from ideal. Fortunately, over the past five years new regulations have come out for both 529s and HSAs that allow them to be more in line with the original good intentions.
529 College Savings Accounts
Originally, 529 accounts were created to help individuals save in a tax-deferred manner for college. However, the 2017 Tax Reform package expanded the eligible benefits and expenses related to 529 accounts. This included tax-free withdrawals for private, public, or religious elementary, middle, and high school tuition. The law also allows traditional 529 accounts to be rolled into 529 ABLE accounts without taxes or penalties.
A major hurdle was overcome with the passing of the SECURE Act 2.0 in December 2022, which allows for tax- and penalty-free rollovers from 529 plans to Roth IRA accounts – up to a $35,000 lifetime cap – beginning in 2024. This is a huge change for the 529s industry and provides a practical solution for the all-too-common question/concern parents have regarding if their kid decides to not go to college. One word of warning is to double-check your individual state’s rules, as several states do not consider K-12 education to be a qualifying expense which means they are operating outside of federal tax laws on the matter.
Heath Savings Accounts (HSAs)
Modern-day HSAs did not come into existence until 2004. These plans possess a triple tax advantage of enabling tax-free contributions, tax-free growth, and tax-free spending. Combining an HSA with a high-deductible health plan is arguably the best way to keep healthcare costs down. High deductibles mean lower premiums, and then the tax-free HSA savings dollars can be used to pay off healthcare-associated deductible amounts. Additionally, HSAs can pay for health-related expenses that are not ordinarily covered by a person’s regular health insurance.
The original IRS-approved, HSA-eligible expense list – although lengthy – overlooked many of the most common expenses that individuals purchase when they go to the pharmacy. That all changed in March 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Now, individuals on an HDHP who contribute to an HSA can use those dollars to purchase/receive reimbursement on over-the-counter drugs/medicines used to treat illness or injury, menstrual care products, sunscreens, and allergy/sinus medications. With these additions to the IRS-approved eligibility list, the practicality of these savings tools has been dramatically improved.
Both 529 plans and HSAs have received recent attention and revisions, making them more appealing to their intended savers, but the rules and regulations surrounding personal finance are in a constant state of change. That is why it is critical to work with a comprehensive financial planner who is continuously monitoring and employing applicable new strategies to your individual plan.
If you are a Syverson Strege client and have questions about how this might apply to your personal scenario, please contact your comprehensive planning team. If you have the need for a comprehensive financial plan, please call us at (515) 225-6000.