529 Plan vs. HSA vs. FSA

What is the 529 Plan?

It is a savings plan for all college expenses. You can contribute money and that money can be used for dorms, textbooks, tuition, and more.

Contribution Limits

The contribution limit is different for every state. It can range from 300k to 500k.

Benefits of the 529 Plan

A 529 plan can be made in any state but there might be some benefits to opening the plan in the state you reside in.

As money is contributed to the 529 plan, the money that is made can become tax-deferred so you don’t have to pay federal taxes. There are 2 types of plans: the prepaid plan and the education savings plan.

Prepaid Plan vs. Education Savings Plan (using Maryland as an example)

The Prepaid Plan

The prepaid plan lets you pay for tuition in the future now. You can pay for it monthly, annually, or in a lump sum amount

Benefits of the Prepaid Plan Include

• Being about to purchase one semester up to 4 years of college

• Potential federal and state tax benefits

• Anyone in 12th grade or younger can be enrolled

• Earnings are tax-free

Drawbacks of the Prepaid Plan include:

• The money can’t be used to purchase the room and board at colleges

• Can’t be used in elementary and secondary schools

• Most have residency requirements so you have to be in that state to have a prepaid tuition plan

• Some states guarantee the prepaid plan while others don’t. You could lose most or all of your money if the sponsor has a financial shortfall

• Not all colleges or universities participate in the plan so if your child goes to a college not participating, they might not get to use as much money

The Education Savings Plan

The education savings plan lets you choose how you want to save for college.

Some benefits include:

• Being able to choose how much you want to contribute (minimum of 25 dollars)

• All earnings are tax-free

• You can use up to 10,000 per year

There are a lot of fees that go into keeping an education savings account.

These fees include:

• Application fees and administrative fees

• Annual account maintenance fees

• Program management fees

• Asset fees

• Collected by the state sponsor

What is an HSA?

HSA stands for health savings account and it is pre-tax savings account for qualified medical expenses.

Many financial companies offer HSAs including banks, insurance companies, and more.

HSAs can be used to pay for:

• Deductibles, copayments, coinsurance, and other expenses

• Qualified out-of-pocket costs include:

  • Acupuncture

  • Ambulance costs

  • doctor visits

  • Hearing aids

  • Prescription drugs

  • Psychological therapy/psychiatric care

  • Qualified long-term out-of-pocket care services

Limits

You can only contribute if you have a High Deductible Health Plan (HDHP). A deductible is the money you pay for expenses before your health insurance plan does. The higher the deductible, the lower the premium costs. (Premium costs are what you pay to your health insurance each month)

The minimum deductible for an HDHP is 1,400 for an individual and 2,800 for a family (2022). The minimum deductible for 2023 is 1,500 for an individual and 3,000 for a family

HSA Contributions

Anyone can contribute to your HSA account; friends, family, employers, etc.

This year, there was a 3,650 maximum contribution for self-coverage plans and a maximum of 7,300 for family coverage plans.

In 2023, there will be a 3,850 maximum for self-coverage plans and a maximum of 7,750 for family coverage plans.

Benefits

There are many benefits to HSAs including:

• No federal income tax

• HSA contributions don’t expire, there is no required time to take out the money. They will stay in the HSA until you use it

• You can use your own HSA plan for your spouse and dependents even if your HDHP doesn’t cover it

• Catch-up contributions

• If you’re 55 or older, then you can contribute an extra 1,000 to your HSA account

Drawbacks

• HSAs cannot be used to pay premiums.

• They are only for people with an HDHP

• If you take money out of your HSA account before you’re 65 years old and use it for unqualified costs then you have to pay the federal income tax on what you took out and you’ll get a 20% tax penalty

• If you take out money and use it for nonqualified expenses after you’re 65, then you won't have to pay the 20% tax penalty on it but you still have to pay the federal income tax

• You are responsible for making sure you have records of the money you are spending your HSA money on

What is an FSA?

An FSA is a flexible spending account (also known as a flexible spending arrangement). To get an FSA account, you have to submit a claim to the FSA with your employer with proof of medical expenses and a statement that those expenses aren't covered by your plan.

Similar to an HSA, FSAs can be used to pay for deductibles, copayments, coinsurance, and some drugs.

Contributions

The maximum contribution is 3,050 per employer.

Drawbacks of the FSA

• You can’t use the money to pay insurance premiums

• You have to use the money within the year you make the plan unless your employer gives you 1 of 2 options

• Give a grace period of two and a half extra months to use your FSA money

• Take at most $610 into the next year of your plan

Comparison

Most Americans have an FSA while most Americans don’t have an HSA. This could be because of the requirements to have an HDHP to have an HSA. The 529 plan is the most common way people save for tuition for their children.

Recommendations

The 529 plan is a great option for saving for college. The education savings plan is far better than the prepaid plan because it has much more flexibility. The risk is a lot lower and it has far more benefits than the prepaid plan.

The HSA and FSA are both great ways to save money for medical expenses. Although the HSA isn’t as inclusive, it can provide really great benefits for those who qualify for it. It can greatly lower medical expenses and it’s tax-free. Everyone who qualifies for it should take advantage of it. The FSA can be good at times but not ideal for those who change employers from time to time.