Quick Answer
This unit covers tax-advantaged specialty accounts: 529 plans and Coverdell Education Savings Accounts for education, Uniform Gifts/Transfers to Minors Act custodial accounts for minors, and Health Savings Accounts for medical costs. Each has its own control rules, contribution caps, income limits, and penalty treatment the exam loves to compare.
The whole unit on one sheet: who controls the money, what goes in tax-free, and the numbers that separate one account from the next.
The One-Liners That Win Points
- 529 plan: state-sponsored education savings; owner keeps control, growth is tax-deferred, qualified withdrawals are federally tax-free. No income limits on contributors, no age limit on the beneficiary.
- Coverdell Education Savings Account (ESA): self-directed (stocks, bonds, funds), broader K-12 expenses, but tiny contribution cap and income limits on the contributor.
- Uniform Gifts to Minors Act (UGMA): holds cash, securities, insurance, and annuities. Uniform Transfers to Minors Act (UTMA) is more flexible, holding any property type including real estate, patents, royalties, and fine art.
- Custodial accounts: one custodian, one minor. The custodian has a fiduciary duty and cannot use assets for personal benefit. No margin, no short selling, no options.
- 529 K-12 covers tuition only; Coverdell K-12 covers tuition, books, supplies, uniforms, tutoring, and equipment.
- Health Savings Account (HSA): the "triple tax advantage" account. Requires a High-Deductible Health Plan (HDHP); no contributions once enrolled in Medicare. Portable and belongs to the individual.
- HSA vs. Flexible Spending Account (FSA): HSA rolls over indefinitely and follows you between jobs; the FSA is generally "use it or lose it" and tied to the employer.
- 529-to-Roth rollover goes into the beneficiary's Roth Individual Retirement Account (IRA), never the owner's.
Numbers to Lock In
| Item | Value |
|---|---|
| 529 annual gift tax exclusion | $19,000 per donor |
| 529 superfunding (5-year front-load) | $95,000 single / $190,000 gift-splitting couple |
| 529-to-Roth IRA lifetime cap | $35,000 |
| 529 account age for rollover eligibility | 15 years |
| 529 K-12 tuition limit | $20,000 per student per year |
| 529 student-loan lifetime limit | $10,000 per borrower |
| Coverdell annual limit | $2,000 per beneficiary |
| Coverdell phase-out, single | $95,000 to $110,000 Modified Adjusted Gross Income (MAGI) |
| Coverdell phase-out, married filing jointly | $190,000 to $220,000 MAGI |
| Coverdell contributions must end | before age 18 |
| Coverdell funds must be used by | age 30 |
| Kiddie tax, parent's rate begins | above $2,700 |
| Free Application for Federal Student Aid (FAFSA) impact, student asset | up to 20% |
| HSA self-only / family contribution (2026) | $4,400 / $8,750 |
| HSA catch-up (age 55 and up) | additional $1,000 |
| HSA non-medical penalty before age 65 | 20% plus income tax |
Top Gotchas
- UGMA/UTMA gifts are irrevocable. Once transferred, the property belongs to the minor, who owns it outright at the age of majority and can spend it on anything. The custodian can never take it back. This is the critical contrast with a 529, where the owner keeps control.
- 529 owner keeps control; the beneficiary never gains ownership at any age. The owner can change the beneficiary to another qualifying family member with no tax hit.
- Kiddie tax applies to children under 18, under 19 if not self-supporting, or full-time students under 24.
- UTMA/UGMA is a student asset (up to 20% FAFSA impact); a parent-owned 529 is a parent asset (up to 5.64%), so the 529 is friendlier for aid.
- 529 non-qualified penalty (10%) hits earnings only, not principal, since principal went in after-tax.
- Coverdell $2,000 is per beneficiary, not per contributor; parent and grandparent share the one cap, and income limits fall on the contributor.
- HSA after age 65: non-medical withdrawals are taxed as income with no penalty, functioning like a Traditional IRA.
- If the donor dies during the 529 superfunding period, a pro-rata share returns to the donor's estate.
One-Breath Recap
Specialty accounts split by purpose and by who holds the reins. 529 plans and Coverdell ESAs fund education tax-deferred with tax-free qualified withdrawals, but the 529 owner keeps control forever while Coverdell adds a $2,000 cap and contributor income limits. UGMA and UTMA custodial gifts are irrevocable: the minor owns the assets and takes full control at the age of majority, and they count as student assets for aid. HSAs are the triple-tax-advantage account, tied to a High-Deductible Health Plan, portable, and penalty-free for non-medical use after age 65. Lock in the control rules and the numbers, and this unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Special Account Types unit for the complete lesson.