If you have a parent age 65 or older and at least one dependent child, you’re a member of the sandwich generation. According to Pew Research, about 23% of U.S. adults are currently “sandwiched” by older relatives and kid(s), who depend on them for financial, physical or emotional support.
Managing your finances in your 40s and 50s can be extremely challenging. When work and family obligations consume all your time and mental bandwidth, planning for the future can seem like an insurmountable challenge.
It all adds up to a lot of worry and stress. But you don't have to navigate complex decisions alone.
Let’s look at a hypothetical couple named Alex and Dani:
Two Busy Professionals With College-Bound Kids
Alex and Dani are in their mid-40s and have two teenagers. Alex runs a successful consulting business, and Dani has a full-time management job at a corporation. They’re both constantly on the go, shuttling kids to extracurriculars, supporting their clients and employees and wishing they had more free time.
Both contribute to retirement plans and 529 savings plans for their kids. Their children also have modest 529s funded by a grandparent.
Dani would love to retire once their kids finish school but has an ongoing medical condition that requires periodic doctor visits and medication. Walking away from a full-time job with medical benefits feels scary.
Even if your circumstances don’t exactly match Alex and Dani’s, their story has some useful financial takeaways. They’re doing the right thing, contributing to retirement savings and 529s, but (among other things) they should consider an FSA or HSA.
What the IRS calls a qualified tuition program (QTP) is commonly known as a 529 plan. A 529 is a tax-advantaged way to save for education expenses because investments grow tax-free.
Tax-free Growth and Tax-free* Withdrawals
Contributions to a 529 are not tax deductible at the federal level, but withdrawals are exempt from federal income tax and capital gains tax when used for qualified education expenses for the designated beneficiary. Qualified expenses include:
Any U.S. citizen over the age of 18 can open a 529 plan and the beneficiary can be anyone with a Social Security number or tax I.D. Different plans are available in different states, but you don’t have to choose a plan from the state you live in, or the state where your beneficiary resides. A financial advisor can help you choose the best option.
* If you live in a state with income tax, consult a financial professional before choosing a 529. While some states allow tax deductions for 529 contributions, others tax distributions from out-of-state 529 plans.
For example, if you live in Alabama and invest in a Florida 529 plan, you will pay state tax on the distributions, even if they’re used to pay for educational expenses. Alabama residents, don’t panic. You can roll over an out-of-state 529 plan into an Alabama 529 plan and both the contributions and earnings are tax-exempt.
In addition to helping you avoid state income tax “gotchas,” a financial advisor can help you:
Use Educational Tax Credits Without Double Dipping
Qualified households can use The American Opportunity Tax Credit or The Lifetime Learning Credit with a 529, but:
For example, if you apply the American Opportunity Tax Credit against the cost of textbooks, 529 funds must be used for non-textbook expenses, such as fees or tuition.
Create a Withdrawal Strategy for Multiple 529 Plans
If you have more than one 529 per child, such as one you created and another from a grandparent, distributions may affect your child’s financial aid eligibility. Timing is key.
Make the Most of Unused Funds in a 529 Account
If your original beneficiary doesn’t use all the funds in their 529 account(s), you can:
The average working-age adult in the U.S. spends $9554-$10,887 each year on health care. This is a 1629% increase over what adults paid 40 years ago, when many members of the sandwich generation were learning to read. By comparison, prices for consumer goods “only” increased 261% in the same timeframe.
If you’re concerned about future medical bills — for you or someone in your family — a health savings account (HSA) is a tax-advantaged way to save for planned and unplanned medical expenses. An HSA allows you to make pre-tax contributions to an account earmarked for medical, dental or vision expenses, up to $4,300 per year for individuals and $8,550 per family (starting in 2025). If the plan owner is 55 or older, they can make an additional catch-up contribution of $1000 per year.
Some HSA plans allow you to invest in securities. Your money grows tax-free and withdrawals are not subject to capital gains or income tax when used to pay for qualified medical expenses for you or immediate family members including:
Unlike FSAs (explained below) HSAs aren’t “use it or lose it.” You can put money in an HSA account and let it grow until you or someone in your family needs care.
Here’s the catch: an HSA requires a high-deductible health plan (HDHP). You’ll pay out of pocket for most medical expenses* until you reach your annual deductible. The average deductible for an HSA-qualified plan is $2500, according to the most recent statistics available.
* Under the Affordable Care Act, certain types of preventative care must be provided at no charge, even if you haven’t met your annual deductible.
If you have the means to cover the high deductible, an HSA has many advantages. Because HSA money goes in pre-tax, you save up to 37 cents on the dollar (depending on your tax bracket). For someone like Dani, who’d like to retire early, HSA savings can provide peace of mind around future medical expenses.
Before you invest in an HSA, take some time to shop around. Not all HSAs allow you to invest in securities; some have limited investment options or charge annual fees.
An FSA (flexible spending account) can also be used to pay for qualified medical expenses. Like an HSA, neither your contributions or withdrawals are taxed by Uncle Sam.
You can enroll in an HSA through your state’s health care marketplace, but FSAs are only available through employer-sponsored plans. FSAs differ from HSAs in a few other significant ways:
Another big difference between an FSA and HSA is the annual election amount. With an HSA, you can add money whenever you want, up to the annual limit. With an FSA, you choose the total amount you want to contribute at the beginning of the plan year and your employer gradually deducts money from your paycheck. Generally speaking, you can’t change your annual election. If you choose to put $600 in your FSA in 2025, that’s the amount you have to work with. It can’t be increased or revoked.
If you have an HSA through your employer, you may have the option to enroll in a limited-purpose FSA (LPFSA). An LPFSA allows you to set aside money (pre-tax) for dental and vision expenses.
Aetna has a helpful overview about the difference between FSAs, LPFSAs and HSAs. For more detailed info, visit the IRS website.
Whether you’re feeling overwhelmed by all the decisions you have to make or just want to confirm you have the best plan in place, we’re happy to help. We’ll help you turn complexity into clarity and create a financial roadmap that’s as individual as you are. Contact us to schedule a free consultation or with any questions you may have.
Disclaimer: Assembly is neither an attorney nor accountant, and no portion of this content should be interpreted as legal, accounting or tax advice. Individuals should consult with an investment professional, or an attorney or tax professional regarding their specific investment, legal or tax situation.