Education funding vehicles
| Vehicle | Key features |
|---|---|
| 529 plan | Contributions not federally deductible; growth and qualified withdrawals tax-free; high contribution capacity; front-loading election allows several years of annual exclusion gifts at once; unused amounts may be rolled to a Roth IRA for the beneficiary subject to strict conditions |
| Coverdell ESA | Low annual contribution limit, income-restricted; can cover K-12 as well |
| UTMA/UGMA custodial | Irrevocable gift to the child; exposed to the kiddie tax; becomes the child's outright at majority |
| Series EE/I bonds | Interest may be excludable when used for qualified education, subject to income phase-outs |
IMPORTANT: Education tax credits (American Opportunity, Lifetime Learning) cannot be claimed for the same expenses paid with tax-free 529 distributions. Coordinating which dollars pay which expenses is a genuine planning decision, not a formality.
Insurance in the plan
- Life insurance — death benefits are generally income-tax-free to the beneficiary, but are includible in the insured's gross estate if the insured held incidents of ownership. An irrevocable life insurance trust (ILIT) is the classic fix.
- Disability insurance — if the employer pays the premiums and excludes them from the employee's income, benefits are taxable; if the individual pays with after-tax dollars, benefits are tax-free
- Long-term care — qualified policy premiums may be deductible as medical expenses within age-based limits
Health savings accounts
An HSA paired with a high-deductible health plan is uniquely triple tax-advantaged: deductible going in, tax-free growth, and tax-free withdrawals for qualified medical expenses. Unused balances roll over indefinitely, making it a legitimate long-term savings vehicle.
EXAM TIP: The disability insurance rule is a favorite: who paid the premium with what kind of dollars determines whether the benefit is taxable. Pre-tax premium → taxable benefit. After-tax premium → tax-free benefit.