Non Taxable Account Types for Retirement and Savings

Tax-advantaged accounts are a common strategy for managing personal finances, allowing savings to grow free from annual taxation. These accounts are designed for specific goals like retirement, healthcare, or education. Their primary benefit is that withdrawals for qualified expenses, including all investment earnings, are received federally tax-free. This is distinct from tax-deferred accounts, such as a traditional IRA or 401(k), where contributions may be deductible but withdrawals are taxed as ordinary income.

Tax-Free Retirement Savings

Roth accounts provide a path to tax-free income in retirement. Contributions are made with after-tax dollars, meaning there is no upfront tax deduction. The advantage is that qualified withdrawals of contributions and investment earnings are free of federal income tax. This structure can be beneficial for individuals who expect to be in a similar or higher tax bracket during retirement.

A Roth IRA is an individual retirement account for those with earned income who fall within certain limits. For 2025, the maximum contribution is $7,000, with an additional $1,000 catch-up contribution for individuals age 50 and over. The ability to contribute is phased out for single filers with a Modified Adjusted Gross Income (MAGI) between $150,000 and $165,000, and for those married filing jointly with a MAGI between $236,000 and $246,000.

For those who exceed these income thresholds, a “backdoor” Roth IRA strategy may be an option. This process involves making a non-deductible contribution to a traditional IRA and then converting that amount to a Roth IRA. It is important to be aware of the pro-rata rule if you have other existing pre-tax IRA assets, as this can result in a portion of the conversion being taxable.

Many employers offer a Roth 401(k) option, which combines features of a traditional 401(k) with the Roth tax structure. Roth 401(k)s have much higher contribution limits, allowing employees to save up to $23,500 in 2025. Catch-up contributions are also permitted for those age 50 and over. The standard catch-up is $7,500, but for those aged 60 through 63, this increases to $11,250 if their employer’s plan allows. Unlike Roth IRAs, there are no income limitations to participate in a Roth 401(k).

For withdrawals from Roth IRAs and Roth 401(k)s to be qualified and tax-free, two conditions must be met. The account owner must be at least 59½ years old, and the account must have been open for at least five years. This five-year clock starts on January 1st of the tax year of the first contribution. Failing to meet these requirements can result in the earnings portion of a withdrawal being subject to income tax and a 10% penalty.

Triple-Tax-Advantaged Health Savings

A Health Savings Account (HSA) offers a triple-tax advantage for individuals and families with specific health insurance plans. The funds can be used for a wide array of medical expenses not covered by insurance and can also supplement long-term retirement savings.

The first benefit is that contributions are tax-deductible, lowering your taxable income for the year. Second, the money within the HSA grows tax-free. The third advantage is that withdrawals are tax-free at the federal level when used for qualified medical expenses.

Eligibility to contribute to an HSA is contingent upon being enrolled in a High-Deductible Health Plan (HDHP). For 2025, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. The plan must also have a maximum out-of-pocket expense limit of $8,300 for self-only coverage and $16,600 for family coverage. Individuals cannot be enrolled in Medicare, claimed as a dependent, or have another health plan that is not an HDHP.

The IRS sets annual contribution limits for HSAs. For 2025, an individual with self-only HDHP coverage can contribute up to $4,300, while those with family coverage can contribute up to $8,550. Individuals age 55 or older can make an additional “catch-up” contribution of $1,000 per year. These limits include any employer contributions.

Unlike Flexible Spending Accounts (FSAs), HSA balances roll over each year, allowing the funds to grow. After age 65, funds can be withdrawn for any reason without penalty. If used for non-medical expenses, the withdrawal is taxed as ordinary income, similar to a traditional IRA distribution. Withdrawals for qualified medical expenses remain tax-free.

Tax-Free Education Funding

Specialized savings accounts can be used to fund education expenses. The most prominent is the 529 plan, a state-sponsored investment account. While contributions are made with after-tax dollars and are not federally deductible, the investment growth and withdrawals for qualified expenses are tax-free.

Qualified education expenses (QEE) for 529 plans are broad and cover many costs associated with post-secondary education. These include:

• Tuition and fees
• Books, supplies, and required equipment
• Room and board for students enrolled at least half-time
• Computers, peripheral equipment, software, and internet access

Recent changes have expanded the use of 529 plans. Funds can now be used for:

• Up to $10,000 per year in K-12 tuition
• A lifetime maximum of $10,000 to repay the beneficiary’s qualified student loans
• An additional $10,000 for each of the beneficiary’s siblings’ student loans
• Costs for registered and certified apprenticeship programs

While there is no federal deduction for 529 plan contributions, many states offer their own tax incentives, such as a state income tax deduction or credit. The specific rules and benefits vary by state.

A Coverdell Education Savings Account (ESA) is a less common alternative. It also allows for tax-free growth and withdrawals for qualified education expenses but has a lower annual contribution limit of $2,000 per beneficiary. It is also subject to income restrictions, with the ability to contribute in 2025 phased out for single filers with incomes between $95,000 and $110,000 and for joint filers with incomes between $190,000 and $220,000.

Savings for Individuals with Disabilities

ABLE (Achieving a Better Life Experience) accounts are state-sponsored savings programs designed to support individuals with disabilities. Created under Section 529A of the tax code, these accounts allow eligible individuals and their families to save for expenses without jeopardizing eligibility for means-tested government benefits.

To be eligible for an ABLE account, an individual must have a qualifying disability with an age of onset before turning 26. Starting in 2026, this age of onset will increase to 46. The account owner can use the funds for qualified disability expenses, which include costs related to education, housing, transportation, healthcare, and personal support services.

Contributions are made with after-tax money. For 2025, the annual contribution limit is $19,000, which is tied to the annual gift tax exclusion amount. An employed beneficiary who is not participating in an employer’s retirement plan may be able to contribute an additional amount from their earnings.

ABLE accounts have a special interaction with benefit programs like Supplemental Security Income (SSI) and Medicaid. An ABLE account balance up to $100,000 is disregarded when determining SSI eligibility. If the balance exceeds this threshold, SSI payments are suspended but not terminated, and Medicaid eligibility remains unaffected.