Special Account Types

The whole unit on one sheet: education savings, custodial accounts for minors, and health-related tax-advantaged accounts the exam loves to compare.

The One-Liners That Win Points

• 529 contributions are not federally tax-deductible (many states give a state deduction); earnings grow tax-deferred, qualified withdrawals are tax-free.
• 529 plans have no income limits and no age limits; the account owner keeps control, not the beneficiary.
• Coverdell education savings accounts DO have income limits; contributions must stop by age 18, funds deemed distributed within 30 days of age 30 (both age limits waived for special-needs beneficiaries); broader investments (stocks, bonds, exchange-traded funds (ETFs)) than most 529 plans.
• Coverdell covers K-12 with no dollar cap; 529 plans cap K-12 expenses (tuition and other qualified costs) at $20,000 per year.
• UGMA covers financial assets only; UTMA covers any property (including real estate); if real estate goes to a minor, the answer is UTMA.
• UTMA/UGMA gifts are irrevocable; the donor cannot claw them back, and the minor gets full unrestricted control at the age of majority. Want retained control? Use a trust.
• UTMA/UGMA assets count as the STUDENT'S assets for financial aid (for a dependent student, higher impact than a parent-owned 529 or Coverdell).
• HSA triple tax advantage: tax-deductible in, tax-free growth, tax-free qualified medical withdrawals; requires a high-deductible health plan (HDHP).
• FSA gives pre-tax contributions and tax-free qualified reimbursements but no growth leg (no investment component), is employer-owned and not portable.

Numbers to Lock In

Top Gotchas

• 529 plans have NO income limits; Coverdell education savings accounts DO. Students confuse 529 deductibility with individual retirement account (IRA) rules; there is no federal 529 deduction.
• Whether changing the 529 beneficiary resets the 15-year rollover clock is an open question; the IRS has not issued final guidance settling it.
• Kiddie tax applies to UNEARNED income (dividends, interest, capital gains), not a minor's job wages; a summer paycheck is taxed at the child's own rate.
• The HSA penalty on non-qualified withdrawals before age 65 is 20%, not the 10% used by IRAs. Qualified medical withdrawals stay tax-free at any age. After 65 the penalty disappears and the HSA acts like a traditional IRA (no penalty, no required minimum distributions (RMDs)).
• HSA needs an HDHP; FSA does not. The high-deductible plan is the main HSA eligibility barrier.
• General-purpose FSA coverage generally blocks new HSA contributions (an existing HSA balance stays available); a Limited Purpose FSA (mainly dental and vision) or a post-deductible FSA is compatible with HSA contributions.

Education-Related Accounts

• 529 plan (qualified tuition program): state-sponsored, education savings plans generally open to any state's residents (prepaid plans typically require residency); two flavors, prepaid tuition (locks current rates, generally tuition and mandatory fees) and education savings (market investments, use nationwide).
• No annual federal contribution limit; high state aggregate limits (often $300,000+); contributions are completed gifts for gift tax purposes.
• SECURE 2.0 529-to-Roth IRA rollover: excess funds move to the beneficiary's Roth IRA if the account is open at least 15 years (excluding the last 5 years' contributions/earnings), capped at $35,000 lifetime, subject to annual Roth IRA limits.
• Coverdell education savings account: $2,000 per beneficiary, income-limited individual contributors, contributions must stop by age 18, deemed distribution within 30 days of age 30 (both waived for special-needs beneficiaries), broadest investment menu, covers K-12 and higher education.

UTMA/UGMA Custodial Accounts

• Irrevocable gift to a minor; a custodian manages until the age of majority, then the minor gains full unrestricted control (the big disadvantage).
• One custodian, one beneficiary; custodian owes fiduciary duty to manage in the minor's best interest.
• No contribution limit, but gifts above the annual gift tax exclusion may trigger gift tax reporting.
• Kiddie tax (2026, child with unearned income only): first $1,350 tax-free, next tier at the child's rate, above $2,700 at the parent's marginal rate if higher; age categories are children under 18, age-18 low earners, and full-time students 19-23 who do not earn over half their support.

Health Savings Accounts and FSAs

• HSA: triple tax advantage, needs an HDHP, no income limits, portable, individually owned, investable; funds roll over indefinitely (no "use it or lose it").
• After 65 the HSA doubles as retirement savings: medical withdrawals stay tax-free, non-medical taxed as ordinary income (no penalty), no RMDs.
• FSA: employer-sponsored, tax-free contributions and qualified reimbursements but no growth component, use-it-or-lose-it (employer may offer ONE relief option, a grace period OR carryover), not portable, cash only, employer-owned.

One-Breath Recap

Education plans win on tax-free growth: 529 plans have no income or age limits with the owner keeping control. K-12 expenses are capped at $20,000, non-qualified earnings generally hit ordinary tax plus a 10% penalty with exceptions, and excess can roll to a Roth IRA after 15 years up to $35,000.

Coverdell education savings accounts add income limits, a $2,000 cap, an age-30 deadline, and broader investments.

Custodial accounts (UGMA for financial assets, UTMA for any property including real estate) are irrevocable gifts where the minor takes full control at majority, and unearned income above $2,700 generally gets kiddie-taxed at the parent's marginal rate.

HSAs carry the triple tax advantage (rare among mainstream account types) but require a high-deductible health plan and levy a 20% penalty on non-qualified withdrawals before 65, whereas FSAs lack the growth leg and are employer-owned use-it-or-lose-it accounts. Lock the comparison tables 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.