By Chris Chen
Learn more about Chris on NerdWallet’s Ask an Advisor
Families caring for disabled individuals got a big boost from Congress in December 2014 with passage of the so-called ABLE Act. That law created tax-advantaged “529A” accounts that can be used to meet the needs of those living with disabilities — similar to the accounts families use to save for college. It’s a significant change to the financial planning landscape for families of people with special needs.
The 529A accounts authorized by the ABLE Act are modeled after 529 college savings plans. Here are some specifics about 529A plans, including how they differ from college 529s:
- Families can establish a 529A account for an individual who meets the Social Security Administration’s definition of disabled. That definition requires that a person have a condition that will make him or her unable to participate in “substantial gainful employment” (work for pay, essentially). The condition must be expected to last for at least 12 months or result in the person’s death. Finally, the beneficiary of a 529A account must have been diagnosed with a qualifying disability before age 26.
- Like the college savings version, 529A plans will be established by states. Presumably, the same state agencies that oversee 529 college plans will be responsible for 529A plans.
- There can be only one 529A account in the name of each beneficiary, and the account will normally be located in the state where the beneficiary lives. That’s different from 529 college plans: There can be multiple 529s for a single beneficiary, and an account can be located in any state (though accounts in the state of residence may have better tax benefits).
- Spending for a beneficiary can occur only in his or her state of residence. This will allow simplified compliance verification for federal and state agencies.
- Contributions to a 529A are made with after-tax dollars and are limited to $14,000 a year (in 2015) for each beneficiary from all sources. Individual states may choose to provide additional tax benefits.
- Investment growth in a 529A is tax-free.
- Distributions (withdrawals) from a 529A account are tax-free as long as the money is used to pay for qualified expenses. Otherwise, withdrawn earnings are taxed at ordinary income rates, with an additional 10% penalty imposed. Qualified expenses include — but are not limited to — housing, transportation, health care, wellness and education.
- Having a 529A does not disqualify an individual from receiving federal and state aid for the disabled, such as Supplemental Security Income or Medicaid, so long as the amount held in the 529A does not exceed $100,000. Should the balance exceed that amount, benefits would be suspended. They could resume once the balance falls below $100,000 again.
Advantages of a 529A
The 529A comes with built-in benefits such as low maintenance costs (hopefully), tax advantages and the ability for a beneficiary to have up to $100,000 in assets earmarked for his or her care without jeopardizing access to public assistance.
These accounts should be attractive to many middle-class families. Similar to the intent of 529 plans for college bound students, the 529A allows families to set aside money for their disabled loved one and use it as needed, while limiting the harmful impact of unforeseen expenses.
Drawbacks of a 529A
However, the 529A’s limits on annual contributions and the $100,000 balance cap may make an account delicate to manage. It is not a vehicle for disabled people to accumulate more than $100,000. In fact, because of the relatively low balance limit, the effects of market fluctuations on investments within the account, and the inevitable withdrawals, many people will want to consider supplementing a 529A with a special needs trust.
The 529A is not perfect. However, it is a great new tool to help families caring for someone with special needs. It allows more families to plan support for their disabled loved ones with an easy-to-use framework that should be relatively low cost and may provide additional funding in the form of tax-free earnings.
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