529A ABLE Accounts For Those With Special Needs
In light of Autism Awareness Month, I wanted to take a minute to blog on something that’s really special, and really important for families with special needs members. While it is Autism Awareness Month, the subject of 529A accounts isn’t limited to those with Autism – rather it’s for all families with special needs members.
Before I dig in, please click the “Light It Up Blue” image to the right to visit my favorite local charity for autism, the Grant A Gift Foundation.
529A Plan Accounts – Tax Benefits For Those With Disabilities
The ABLE Act (Achieving a Better Life Experience) was enacted on 12/19/14. It allows for a new type of tax-advantaged savings account under IRS section 529A. Unlike most other accounts, the 529A plan is specifically designed to benefit those with disabilities, and the benefits are really quite impressive!
The Benefits Of The 529A Account
Let’s start with the obvious. You’ve probably heard of a 529 college savings account by now, and the 529A accounts are strikingly similar in how they work.
- Tax-Deferred Account Growth – Your investment earnings are tax-deferred and potentially tax-free if used for “qualified expenses”
- 10% Penalty On Gains for NON-Qualified Expenses – If you use funds from a 529A for expenses which don’t qualify for the program, your investment earnings will be subject to ordinary income tax and a 10% penalty
- State Transferable – You don’t have to open the 529A account in the state you live in, you can enjoy the benefits no matter what state you live in, and you can transfer tax-free between state plans (this is a new amendment to the plan, the original intention was you must use your own state’s plan)
- Anyone Can Contribute – Friends and relatives can make contributions to a 529A account for the benefit of a disabled person
- Diversified Investment Options – Plans will offer everything from stock and bond funds to money markets
- Plan’s Custodian Makes Investment Decisions – The account owner – a guardian for the disabled beneficiary – will choose the investment allocation
- State Tax Breaks – Some states will provide a state tax break for using their state’s plan, however, this won’t affect us in Nevada with no state income tax
Unlike 529 college savings accounts, 529A account contributions are capped at $14,000 – the annual gift exclusion limit. That $14,000 limit relating to the annual gift exclusion seems very arbitrary because it’s a hard limit, you can’t, for example, double the amount for two parents contributing to the plan.
Also unlike 529 plans, the beneficiary can only have ONE such account. For these reasons, it’s unlikely these accounts will generate significant sums of capital, though any assets providing tax-deferral and potentially tax-free withdrawals are better than none!
Other differences are with a 529 college savings plan you can transfer amounts from one beneficiary to another. With the 529 ABLE accounts, you can’t transfer the funds to another beneficiary, specifically because the qualifications to be a beneficiary require a disability. As such, contributions to a 529 ABLE account are IRREVOCABLE. Once contributions are made they can’t be taken back EVEN if the custodian is willing to pay the 10% penalty on growth – the funds are permanent to be used for the benefit of the disabled beneficiary. Finally, changes to the 529A account’s investments may be made twice per year, UNLIKE the 529 college savings plan which has a once per year limitation.
What are 529A Qualified Expenses?
Qualified expenses from a 529A account will generally be limited to:
- Education
- Housing
- Transportation
- Employment Training
What About Medicaid Eligibility?
Perhaps the biggest benefit of the 529A account is it can be as large as $100,000 and the beneficiary will still qualify for Medicaid and SSI (Supplemental Social Security Income). Prior to the ABLE Act, a person could have no more than $2,000 to qualify for SSI, and the Medicaid cap was very similar.
Additionally, if the beneficiary is receiving Medicaid and they die with money left in the 529A account, the state has the right to seek repayment of Medicaid benefits paid.
How Does A Beneficiary Qualify For The 529A Account?
To qualify as a designated 529A beneficiary the individual must meet the following criteria for at least 12 consecutive months:
- Qualify for SSI or Social Security Disability Insurance Benefits, OR
- Possibly a doctor’s diagnosis would suffice (undetermined as of yet)
- Be blind, Or
- Have a severe physical or mental disability prior to age 26.
While not every state has adopted legislation to sponsor 529A accounts it’s highly likely they will in the coming months if the market is big enough. That’s the golden question, however, “is the market big enough to warrant every state to adopt this plan?”
Data from the 2013 American Community Survey done by Cornell University shows 12.6% of Americans are disabled. Roughly 11% of those were between the ages of 21 and 64, and over half were age 75 or older. Given the stats, there may not be a need for every state to adopt the 529A plan accounts.
The actual 529A accounts aren’t available yet, however, Nebraska, Florida, and Virginia plan to offer these accounts sometime in 2016. Noteworthy is Virginia because they have a very strong 529 college savings account which hopefully means their 529A account options will follow suit. Nevada has enacted the ABLE legislation, yet it’s unclear if they’ll see enough of a market to actually dig in and sponsor plans here.
Keep in mind, this act and these plans are so new they’re going through changes as we get closer to a real live viable option. The information above is the best I can gather as of today, but expect more changes through the remainder of this year.