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 and funds must be used by age 30; 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 tuition 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 (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 only ONE tax break (on contributions), no tax-free growth, 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.
• If the 529 beneficiary is changed, the 15-year rollover clock resets to the new beneficiary's designation date.
• 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 before age 65 is 20%, not the 10% used by IRAs. 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.
• You generally cannot hold a general-purpose FSA and an HSA at once; you can pair an HSA with a Limited Purpose FSA (dental and vision only).

Education-Related Accounts

• 529 plan (qualified tuition program): state-sponsored, invest in any state's plan; two flavors, prepaid tuition (locks current rates, tuition and mandatory fees only) 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, capped at $35,000 lifetime, subject to annual Roth IRA limits.
• Coverdell education savings account: $2,000 per beneficiary, income-limited contributors, use by age 30, 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): first $1,350 tax-free, next tier at the child's rate, above $2,700 at the parent's marginal rate; applies to 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, single tax break, 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 tuition capped at $20,000, non-qualified earnings hit ordinary tax plus a 10% penalty, and excess can roll to a Roth IRA after 15 years up to $35,000), while 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 gets kiddie-taxed at the parent's rate. HSAs carry the unique triple tax advantage but require a high-deductible health plan and levy a 20% penalty before 65, whereas FSAs only shield contributions 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.