Do you have a child with disabilities? You might benefit from investing in a 529 ABLE account. These tax-advantaged savings accounts let you save money for your child’s long- or short-term care without jeopardizing their eligibility for public assistance from the government.
Many parents with special needs children may not even know this savings vehicle exists. After all, it wasn’t until 2014 that legislation paved the way for the 529 ABLE account. If you’re the parent of a child with a disability, here’s everything you should know about these tax-advantaged accounts.
A new opportunity
Congress signed the Achieving a Better Life Experience, or ABLE, act into law in 2014. The new law gave families with special needs children the option to save post-tax dollars in a new type of account. These ABLE accounts were designed to give families a way to save extra money in addition to the financial benefits their disabled child was already receiving from private insurers or from government programs such as Social Security and Medicaid.
It’s a huge positive that families can save in an ABLE plan without losing their eligibility for financial government assistance. Before the act was passed, disabled people who earned more than $700 a month or who had more than $2,000 in assets could lose their eligibility for Medicaid and Social Security assistance.
The ABLE Act changed that. Today, families can save up to $100,000 in a 529 ABLE account before their child will lose their extra Social Security benefits. Even if they do save more than $100,000 in an account, their child will still be eligible for financial assistance from Medicaid. The money saved in a 529 ABLE account does not count against that $2,000 asset limit.
How they work
A 529 ABLE account works similar to its cousins, the 529 college savings and prepaid plans. But it does come with some key differences.
As with a traditional 529 savings plan, the contributions that you make to an ABLE account are not tax-deductible. But the earnings on those investments will not be taxed as long as you use any money you withdraw from the account for what are known as “qualified disability expenses.” With 529 ABLE accounts, you can withdraw money tax-free for several types of expenses. Qualified disability expenses include money spent on health, education, housing, transportation, legal fees, employment training, and monitoring.
In other words, there is more flexibility with a 529 ABLE account. Where there is less flexibility, however, is in eligibility. To be eligible for a 529 ABLE account, individuals must meet specific requirements.
There is only a narrow band of individuals who are eligible for 529 ABLE accounts. Individuals participating must have been diagnosed with a disability before they turned 26 and must have a disability that is expected to last at least 12 consecutive months.
Individuals must also already be receiving benefits through the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs offered through Social Security, or obtain a certificate of disability from a doctor.
For the 2018 tax year, individuals can make an annual contribution up to $15,000 into an ABLE account.
These accounts are sponsored by individual states. If your state doesn’t offer a 529 ABLE account, you can still participate. You are free to sign up for an ABLE account through any state offering one, even if you don’t live in that state.
Changes under the Tax Cuts and Jobs Act
In more good news, two key changes that came with President Trump’s Tax Cuts and Jobs Act, signed into law late last year, make 529 ABLE accounts even more attractive.
The new federal law allows for tax-free rollovers from traditional 529 plans to 529 ABLE accounts. This is a benefit to individuals whose disabilities are diagnosed later in life. Say you’ve saved money for your child in a traditional 529 plan. When your child turns 16, he or she is diagnosed with a disability. In the past, if you wanted to take your funds from the traditional 529 plan and roll them into an ABLE account, you’d have to pay taxes and a financial penalty. Today, you can rollover funds from a traditional 529 plan into an ABLE account without suffering any financial penalties or paying taxes on the money.
The new tax law also allows ABLE account beneficiaries who are employed and earning income through their jobs to make contributions of more than $15,000 each year up to the Federal Poverty Level, as long as they are using their own income to get past that $15,000 mark and not participating in an employer-sponsored retirement plan.