Whether you’re saving for future health care costs or education expenses, Health Savings Accounts (HSAs) and 529 Plans offer notable tax advantages that can help you build a robust financial plan. But what if you end up not using every dollar you’ve stashed away? Below, we delve into the dilemma of unused funds in HSAs and 529s—then explore other tax-advantaged accounts that may present similar opportunities or challenges. Finally, we outline whether (and how) each account can be converted or withdrawn if you no longer need it for its primary purpose.
Health Savings Accounts (HSAs)
What Is an HSA?
A Health Savings Account is a special savings vehicle designed for individuals with high-deductible health plans (HDHPs). Contributions to an HSA are made either pre-tax (through your employer) or tax-deductible (if you contribute on your own). The money then grows tax-free, and withdrawals for qualified medical expenses are also tax-free.
- Eligibility: You must be enrolled in an HDHP. HDHPs have specific deductibles and out-of-pocket maximums set annually by the IRS.
- Contribution Limits: For 2025 (hypothetical example, since annual IRS updates vary), let’s say an individual might contribute up to $4,150 and a family up to $8,300, plus an additional catch-up contribution of $1,000 if you’re age 55 or older.
- Medical Expense Coverage: HSAs can pay for doctor visits, prescriptions, certain over-the-counter medications, medical equipment, and more—always check IRS guidelines for eligible expenses.
Conversion Options
- Direct Conversions:
HSAs cannot be converted to other account types, such as 529s, IRAs, or Roth IRAs. You can, however, transfer or roll over funds from one HSA to another HSA if you change providers or employers.
Withdrawal Options
- Before Age 65 (Non-Medical):
Any amount withdrawn for non-qualified expenses will be subject to income tax plus a 20% penalty. - After Age 65 (Non-Medical):
You can withdraw HSA funds penalty-free for any reason. If the withdrawal is not for qualified medical expenses, you do pay ordinary income tax (similar to a Traditional IRA). - Qualified Medical Expenses (Any Age):
Withdrawals for qualified medical expenses are always tax-free.
Key Takeaway: HSAs offer triple tax advantages (pre-tax contributions, tax-free growth, and tax-free qualified withdrawals). If you don’t use all your funds on medical costs, you can still access them after 65 for any purpose—just be prepared to pay income tax on non-medical distributions.
529 Plans
What Is a 529 Plan?
A 529 Plan is a state-sponsored education savings account, although you can open a plan sponsored by any state, not just your own. Contributions grow tax-free, and withdrawals for qualified education expenses (like tuition, fees, books, and sometimes room and board) are federally tax-exempt, and often state-tax-exempt as well.
- Types of 529 Plans:
- Prepaid Tuition Plans: Let you lock in current tuition rates at eligible public and private colleges.
- Education Savings Plans: Invest contributions in mutual funds or similar vehicles for tax-free growth, which can be used at most accredited institutions.
- Contribution Limits: While the IRS doesn’t impose a specific annual limit, each state sets its own lifetime maximum—often ranging from $200,000 to $500,000+ per beneficiary.
Conversion Options
- Rollover to a Roth IRA (SECURE 2.0)
- Starting in 2024, you can move up to a $35,000 lifetime maximum from a 529 to a Roth IRA for the same beneficiary, subject to annual Roth IRA contribution limits and other requirements.
- The 529 must be at least 15 years old, and contributions (and associated earnings) made within the last 5 years are not eligible.
- The beneficiary must have earned income in the year of the rollover.
- Rollover to an ABLE Account
- If the beneficiary has a disability, you can move 529 funds into an ABLE (529A) account, up to the annual gift tax limit, allowing tax-free use for qualified disability expenses.
Withdrawal Options
- Qualified Withdrawals:
Used for college (and sometimes K-12) expenses, including tuition, fees, books, supplies, and even some technology costs (like computers). - Non-Qualified Withdrawals:
Earnings portion is subject to income tax + a 10% penalty. The principal you contributed is always yours (you already paid taxes on it). - Changing Beneficiaries:
You can switch the beneficiary to another eligible family member if your original beneficiary doesn’t use the funds.
Key Takeaway: 529 Plans are highly flexible for education spending and can now be rolled into a Roth IRA under certain conditions—making them a great option even if you’re unsure how much schooling your loved ones will need.
Flexible Spending Accounts (FSAs)
What Is an FSA?
A Flexible Spending Account is an employer-sponsored plan that lets you set aside pre-tax money for eligible out-of-pocket health (or dependent care) expenses. The funds are generally accessible via a special debit card or reimbursement process.
- Use-It-or-Lose-It: FSAs typically require you to use your contributions within the plan year. Some employers offer a grace period (2.5 months) or let you carry over a limited portion (e.g., $610-$640) to the next year.
- Types of FSAs:
- Health Care FSA: Covers medical, dental, and vision costs not covered by insurance.
- Dependent Care FSA: Covers childcare or adult day care expenses.
Conversion Options
- None:
You cannot roll over or convert an FSA into another account like an HSA or 529.
Withdrawal Options
- Qualified Medical/Dependent Care Expenses:
Reimbursements for qualifying expenses are tax-free (and generally must be incurred in the same year the money is contributed). - Unused Funds:
If they’re not spent by the plan’s deadline (year-end or grace period), you forfeit them to the plan.
Key Takeaway: FSAs offer immediate tax savings but limited flexibility if you don’t use all the funds. If you find you’re consistently not spending your full FSA amount, consider lowering your contribution.
Coverdell Education Savings Accounts (ESAs)
What Is a Coverdell ESA?
A Coverdell ESA is a trust or custodial account intended to pay for a child’s educational expenses at any level, from elementary through higher education. Contributions are not tax-deductible, but the funds grow tax-free, and withdrawals for qualified education expenses are tax-free.
- Contribution Limits: You can only contribute up to $2,000 per year per beneficiary until they turn 18 (unless the beneficiary has special needs).
- Qualified Expenses: Include tuition, fees, academic tutoring, books, supplies, and equipment required for enrollment—this can apply to private or parochial schools at the K-12 level, which is a key advantage over 529s (which are more limited in K-12 usage).
Conversion Options
- Rollover to a 529 Plan:
You can roll a Coverdell ESA into a 529 Plan for the same beneficiary or another eligible family member. This is particularly beneficial if you no longer need Coverdell funds for K-12 or want to take advantage of a state’s 529 plan benefits.
Withdrawal Options
- Qualified Education Expenses (K-12 or College):
Withdrawals are tax-free if used for eligible costs. - Non-Qualified Withdrawals:
You’ll face income tax on the earnings plus a 10% penalty on the earnings portion. - By Age 30:
The beneficiary must use the account by age 30 (unless the beneficiary has special needs) or you must roll it over into another ESA or 529 for a younger family member. Otherwise, the leftover funds incur taxes and penalties on the earnings.
Key Takeaway: Coverdell ESAs allow you to cover a wider range of education levels than some 529 Plans, but you’re capped at $2,000 per year per child. Rolling leftover funds into a 529 is a common strategy to avoid penalties.
ABLE Accounts (529A)
What Is an ABLE Account?
An ABLE (Achieving a Better Life Experience) account, also called a 529A account, is designed for people with disabilities. It allows them (or their families) to save for qualified disability-related expenses without disqualifying the beneficiary from certain federal means-tested benefits (like Medicaid).
- Eligibility: The beneficiary must have a qualifying disability that began before age 26 (this age may be increasing to 46 under certain legislative proposals, but it varies by state and federal law changes).
- Contribution Limits: Contributions can be made by anyone but cannot exceed the annual gift tax exclusion amount (e.g., $17,000 for one year). Total account balances also have state-specific caps.
Conversion Options
- 529 to ABLE:
You can roll over an existing 529 Plan to an ABLE account for the same beneficiary (if they meet the disability criteria) or for another eligible person with a disability, up to the annual contribution limit.
Withdrawal Options
- Qualified Disability Expenses:
Withdrawals for expenses related to the individual’s disability—such as housing, transportation, assistive technology, education, and employment training—are tax-free. - Non-Qualified Withdrawals:
Earnings portion is subject to income tax plus a 10% penalty, similar to other savings plans.
Key Takeaway: ABLE accounts empower individuals with disabilities to maintain a financial safety net without jeopardizing vital government benefits. A 529 rollover can also repurpose leftover education funds if a beneficiary develops or already has a qualifying disability.
Individual Retirement Accounts (IRAs)
What Are IRAs?
Individual Retirement Accounts (Traditional or Roth) are designed primarily for retirement savings. They come with various tax advantages depending on the type:
- Traditional IRA: Contributions can be tax-deductible, and earnings grow tax-deferred. Withdrawals are taxed as ordinary income in retirement.
- Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free (assuming you meet age and holding-period requirements).
Conversion Options
- Traditional to Roth Conversion:
You can convert Traditional IRA funds to a Roth IRA (paying income tax on the conversion amount). This might be beneficial if you expect higher tax rates in the future or want to avoid Required Minimum Distributions (RMDs).
Withdrawal Options
- Before Age 59½:
Generally, you’ll face a 10% penalty plus income tax (for Traditional IRAs) unless you qualify for an exception (like first-time home purchases, disability, etc.). - After Age 59½:
Traditional IRA withdrawals are taxed as ordinary income. Roth IRA withdrawals can be tax-free if you’re over 59½ and have met the five-year holding requirement.
Key Takeaway: While not designed for education or medical expenses, IRAs can sometimes complement other accounts if you have surplus retirement funds or if certain exceptions apply for education or first-time home purchases (Roth). They’re a crucial piece of an overall financial strategy.
Deferred Compensation Plans (457, SERP)
What Are Deferred Compensation Plans?
Deferred Compensation Plans let you defer part of your salary or bonus until a later date—often retirement. These include 457 plans (commonly offered by government or certain non-profit employers) and SERPs (Supplemental Executive Retirement Plans) aimed at high-level executives.
- Tax Advantages: Money grows tax-deferred until distribution.
- Plan-Specific Rules: Each employer’s plan can be quite different regarding contribution limits, withdrawal timelines, and penalties.
Conversion Options
- 457 to IRA Rollover:
Many public sector 457 plans allow a rollover into a Traditional IRA when you leave your employer, avoiding immediate taxes. - SERPs:
These are often more restrictive. Your employer determines how and when distributions occur, and you may not be able to roll them into an IRA or 401(k).
Withdrawal Options
- Upon Separation or Retirement:
You might receive a lump sum or periodic payments. Strategic planning can help you avoid a large tax bill by spreading out distributions over multiple years, if the plan allows.
Key Takeaway: Deferred compensation plans can be powerful but also highly individualized. If leftover or unneeded funds accumulate, you may have fewer conversion options, so check your plan documents carefully.
Putting It All Together: Planning for Unused Funds
- Start with a Clear Goal
Before opening any tax-advantaged account—HSA, 529, Coverdell ESA, or something else—ask yourself how likely you are to use every dollar for its intended purpose. If there’s a possibility of leftover funds, choose (or combine) accounts that allow conversions or rollovers to preserve tax benefits. - Monitor and Reevaluate
Changes in life—educational paths, medical needs, or even legislative updates—can reshape your best-laid plans. Review your accounts and contributions every year or two, adjusting as needed. - Consult Professionals
Estate planning attorneys, financial advisors, and tax professionals can help you navigate the nuanced rules and ensure your savings align with your broader financial and legacy goals. They’ll also keep you aware of new opportunities (like 529-to-Roth rollovers) or changes in eligibility.
Final Thoughts
Tax-advantaged accounts like HSAs and 529 Plans can be incredibly powerful, but it’s easy to get caught off guard if you end up with unused funds. Fortunately, many of these accounts—from Coverdell ESAs and ABLEs to IRAs—have increasingly flexible conversion and withdrawal rules designed to help you minimize taxes and penalties.
If you’re unsure which combination of accounts best fits your situation—or how to handle money left over—don’t hesitate to seek professional guidance. Our team at Slowik Estate Planning can help you align your strategy with your unique financial goals, whether you’re just starting out or reassessing an established plan.
Disclosures
This blog post is intended for informational purposes only and does not constitute legal, financial, or tax advice. Rules and regulations can change, and each situation is unique. Always consult a qualified professional to discuss your individual needs and circumstances.
Slowik Estate Planning is here to help you discover the best strategies to maximize your HSA, 529, and other accounts—ensuring that any leftover funds can still benefit you or your loved ones without unnecessary taxes or penalties. Feel free to reach out and schedule a consultation today!
