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HSA and 529 unique question

Hello, I am not an expert on this stuff and have spent hours trying to look up these laws and talking to various experts on this and everyone seems to be a bit stumped...


I generally earn approximately 20-30k in 1099 income which is not taxed. Historically, I end up owing quite a bit of taxes each year. I am setting money aside for taxes/making quarterly payments based on my estimates of my anticipated income, but I'm hoping to lower my overall tax burden by decreasing my taxable income. Some relevant background info: We are pregnant and expecting our baby before the end of the year. I have lots of student loan debt (~90k) that I am trying to pay off as quickly as possible. I recently revived an HSA account that a few hundred bucks in it from my previous employer (my current employer's plan does qualify as a HDHP per IRS).


Here is my plan:

-maximally fund HSA with post tax contribution (it seems my HSA allows pre and post tax contribution), then use those funds to pay medical expenses we accrue this year

-open up 529 plan under my own name, fund it with $10,000, then use the funds in the 529 to pay student loan (it seems this is a qualified education expense per SECURE Act) eventually transfer 529 to child or close 529. I realize this will have no impact on my federal income tax, but the state I am in does seem to allow a deduction up to that value. I'm not worried about not being able to claim $2500 or whatever it is in interest since there has been no interest accrual during COVID forbearance

-I am prioritizing paying off the loan as quickly as possible, paying all of the medical expenses we accrue this year, as well as lowering my overall tax burden so I owe less come next April


Essentially, I'm using money I already have set aside for these purposes and funneling them through a vehicle for the express purpose of lowering taxable income. I realize this is convoluted. I think contributing to Roth would help, but I don't feel comfortable doing that right now since I need those funds to help cover living expenses and emergency fund, so this plan allows me to use money I already have earmarked, but also allows me to get a slight tax benefit?



1. Does funding HSA post tax lower my taxable income (similar to how a Roth IRA might work)? 

2. Does this all check out? Am I missing something or misunderstanding something? I have talked to different tax experts and they were stumped 



6 Replies

HSA and 529 unique question

find a tax pro - lawyer or CPA and go by their guidance.  you have multiple answers that differ sopro advice is warranted.  this is a public forum and the knowledge level among responders varies so you need a person you can rely on.  



as to HSA you can't contribute for months you are not covered by a HDHP. such contributions are subject to penalty if not withdrawn. 



a ROTH IRA is not deductible so it doesn't lower your taxable income. 

HSA and 529 unique question

@Mike9241 is correct that no one here can be aware of your entire financial situation which is necessary to help you. There are unanswered questions here, like why is your 1099 income not taxed and does your state allow student debt to be paid from a 529?

HSA and 529 unique question

@mc1231 also, given everything the Biden administration is does to devise better and unique repayment plans, have you considered any of those options?  That could be a way to significanty reduce the monthly payments. 

HSA and 529 unique question

"1. Does funding HSA post tax lower my taxable income (similar to how a Roth IRA might work)? "


An HSA reduces your taxable income.  A Roth IRA does not reduce your taxable income.  You may be thinking of a traditional pre-tax (deductible) IRA.  If you make deductible IRA contributions to a traditional pre-tax IRA, that reduces your taxable income, and you pay the tax when you withdraw the funds.   Contributions to a Roth IRA are not deductible and do not reduce your taxable income, so you pay the tax now but you don't pay tax when you withdraw the funds.


Also, if your employer allows you to make pre-tax HSA contributions through payroll deduction, that is better than contributing your after tax dollars.  With after-tax contributions, your state and federal income tax is reduced.  With payroll contributions, your social security and medicare withholding is also reduced, so you save an extra 7.65%.  Even if your current employer is not sponsoring the HSA, you do get the state and federal deduction if you make after-tax contributions.


Also, if your spouse is covered by your family HDHP, then she is eligible to contribute to an HSA in her own name.  Your family maximum is the same ($7750 for 2023, or less, depending on when you enrolled in the qualifying HDHP), but you could split it between the two accounts.  An HSA is owned by only one person, there are no joint HSAs even if you are married, and there may be reasons to have an account in each spouse's name.


"2. Does this all check out?"


More or less.  The Roth idea doesn't help, see above.  You can reduce your taxable income by contributing to a pre-tax (deductible) IRA, if your income is within the right limits, but you can't take the money out again until you retire or you pay income tax plus a 10% penalty.  It's good for the future but it's not the same as "washing" money through the HSA, where you deposit money, get the deduction, then withdraw it immediately to pay current bills.  Like the HSA, your spouse can contribute to an IRA in her own name, even if she does not work, by using your income as the basis for her contributions.


If you have a schedule C self-employment side gig of some kind, you may also qualify for a self -employed 401k plan.  This has much higher contribution limits that an IRA (up to $66,000, or up to your self-employment income, instead of a maximum of $6500).  Again however, while this is a substantial tax deduction, it locks the money away until retirement, and doesn't give you the ability to take a tax deduction and still spend the money, like the HSA does.



Yes, you can also "wash" money through a 529 plan to pay your student loan, and you will get a state tax deduction.  Any interest or investment gains will be tax-free, but you may not have much in the way of gains the way you plan to use the account.  You may be allowed to contribute much more than $10,000, depending on your state, but you can only withdraw $10,000 for student loan payments.  So any contributions over that amount would have to be used for future student loan payments or your child's expenses.  (You must change the beneficiary of the account from yourself to your child after you are finished with the student loan.)


Depending on your state income tax rate, you might save $500-$1000 in state income taxes this way.  However, I would not completely discount the federal student loan deduction.  Even though interest may not be accruing, I suspect you are still paying the interest that accrued before the pandemic.  Check with your lender.  (It would be extraordinarily generous if they applied 100% of your payments to the principal.)  If you did have $2500 in interest payments, that could save you $550 in federal tax and $125-$250 in state tax, depending on your overall income and other deductions.  Depending on your income, your state tax rate, and your interest payment, one option might save more than the other. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

HSA and 529 unique question

@Bsch4477  i think by not taxed the op is really saying no taxes taken out. 

HSA and 529 unique question

@Mike9241 wrote:


as to HSA you can't contribute for months you are not covered by a HDHP. such contributions are subject to penalty if not withdrawn. 


If the taxpayer is covered by a qualified HDHP on the last month of 2023, and plans to remained covered for all of 2024, they can use the "last month rule" to make a full contribution for 2023, even if they weren't covered by the HDHP for every month.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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