Smart Tax Moves for UGMA Accounts, 529 Plans, and IRAs: What You Need to Know Before You Decide

When it comes to taxes, every financial account plays by its own rules and if you don’t know those rules, it’s easy to pay far more than you need to. In this episode, I walk through some of the biggest tax traps (and opportunities) inside UGMA accounts, 529 plans, IRAs, HSAs, and inherited retirement accounts. Whether you’re planning for college, managing a windfall, or preparing for early retirement, getting these decisions right can save you thousands.

George from Torrance reached out about a large UGMA account he set up for his kids, and his question is one I hear all the time: “How do I keep taxes low?” UGMA accounts fall under the kiddie tax rules, which means the first $300 of income is tax-free, the next $1,300 gets taxed at the child’s rate usually 10% and everything above $2,600 is taxed at the parents’ rate. That makes investment selection really important. Growth-oriented ETFs, which generally don’t throw off much taxable income, are far more efficient than dividend-heavy or interest-producing investments. And before you sell anything, make sure you know the cost basis, especially if some contributions came from grandparents. Without that number, you’re flying blind.

Suzanne from Detroit had a great question about 529 plans and the new ability to roll up to $35,000 into a Roth IRA. It’s a phenomenal rule under the right circumstances. The 529 must be at least 15 years old, and any contributions made in the last five years don’t qualify. In her case, her daughter has $60,000 in the 529 and plans to pursue a degree costing $120,000. The math is simple: use the 529 for education. Education expenses are tax-free, and she needs the funds. The Roth rollover is tempting, but it shouldn’t override the primary purpose of the account.

Then we had Homer and Marge from Northern California one of my favorite conversations. They’ve saved aggressively, with $2.5 million in pre-tax retirement accounts and $105,000 in 529s for their kids. They earn $650,000 as a household, want to retire around age 50 to 59½, spend about $20,000 a month, and plan to pay off a $730,000 mortgage. They’re doing almost everything right, but even high earners have to quantify spending. Their numbers work, but only because they’re saving a massive amount. Their situation is a great reminder: retirement planning isn’t just about assets it’s about understanding cash flow.

We also dug into a case involving someone earning $640,000 but spending over $240,000 a year while claiming they’re saving nearly $200,000. Their savings didn’t match their lifestyle, and with $3 million saved in tax-deferred accounts but no brokerage account, it was clear they didn’t know where their money was going. The good news? With income that high, discipline not income is the missing piece. With proper tracking and intentional investing, they can sustain a very comfortable lifestyle.

Another important topic was inherited IRAs. When someone inherits an IRA like the case with the $950,000 account the shock usually comes in the form of RMDs. Their estimated RMD was about $35,000, which seemed low for an account that size. We recommended taking withdrawals up to the top of the 24% bracket (around $400,000 of taxable income for married couples). It’s rarely fun to accelerate taxes, but with future brackets likely to rise, paying 24% today can be cheaper than paying 32% or 35% later.

We also covered Health Savings Accounts (HSAs), which I consider one of the best tax deals available. Every dollar goes in tax-deductible, grows tax-free, and can be spent tax-free for medical expenses. Maxing out an HSA is almost always a no-brainer. After age 65, you can withdraw the funds penalty-free for any purpose you’ll just pay ordinary income tax, similar to a traditional IRA. But it’s critical to understand the six-month Medicare rule: once you enroll in Medicare, your HSA eligibility ends retroactively. Poor timing can cost you an extra penalty.

Finally, we talked about tax strategy for those approaching RMD age. Roth conversions are incredibly powerful between retirement and age 73, especially if Social Security is delayed. Converting assets while your income is low can save tens of thousands later. For charitably inclined retirees, Qualified Charitable Distributions (QCDs) allow donations directly from an IRA after age 70½ reducing taxable income without itemizing. And we always emphasize one core principle: the goal isn’t to pay zero tax, it’s to pay the least over your lifetime.

No two financial situations are identical. These strategies only work when applied to your specific income, age, goals, and tax bracket. The key is understanding your accounts, knowing the rules, and coordinating all the moving parts. Tax planning isn’t a once-a-year exercise it’s a lifelong strategy.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.

IMPORTANT DISCLOSURES:

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.

• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.

• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.