Families should know about these new tax-advantaged savings vehicles.
Families with special needs children have a new tax-advantaged savings option. The ABLE account, also called a 529A savings account, is patterned after the popular 529 savings plan created to help parents save for a child’s higher education. Like 529 plans, they are run by the states rather than the federal government.1,2
ABLE accounts address an underpublicized financial need. While some families open college savings accounts, very few start discrete savings accounts or trusts for children with disabilities. That difference may be partly due to the presumption that “the money will be there” when a disabled child becomes an adult.
The money may not be there, at least not as much many families hope. Increasingly, state agencies and non-profit groups helping the disabled face funding challenges and pressure to limit the “entitlements” they distribute. Social Security, which provides Supplemental Security Income (SSI) to millions of disabled adults, faces its own set of pressures.
Financially and legally, what changes when a special needs child turns 18? As an adult, a disabled person becomes eligible for Medicaid and monthly SSI payments, provided that he or she meets the financial requirements, typically only available to those with $2,000 or less in assets. Some special needs adults have more than $2,000 in assets in their name by age 18. Savings accumulate, family gifts and investments are made on behalf of the child, and suddenly that young man or woman is ineligible for fundamental health care and income benefits.2
ABLE accounts nicely address this dilemma. Money accumulated in a tax-advantaged ABLE account does not count toward that $2,000 total.2,3
How much can you save annually through an ABLE account? Currently, an individual can contribute as much as $14,000 a year to one of these accounts; yearly contributions are capped at the current federal gift tax limit. The account can contain as much as $100,000 in some states, as much as $300,000 in others; the total limit corresponds to a state’s dollar limit on 529 college savings plans. Past that limit, the ABLE accountholder loses eligibility for SSI payments (though eligibility for Medicaid is retained).2,3
More than 30 states have enacted ABLE accounts. If your state is not among them, you can go ahead and open an ABLE account through another state’s program.1,2
ABLE accounts are becoming an important component of special needs planning. An account with a ceiling of $100,000 (or $300,000) probably won’t hold enough to cover lifetime care expenses for most disabled adults, even if replenished. So the ABLE account should not be seen as a standalone financial “answer” for families with mentally or physically challenged children, but as part of a greater financial strategy. An ABLE account can be used in tandem with a supplemental needs trust, as well as other savings efforts.2,3
These accounts do have their shortcomings. The biggest drawback of ABLE accounts is that they do nothing for people who become disabled after age 26. By law, they cannot be opened for a disabled person older than 26 unless proof is shown that the individual became disabled prior to that age. Another little-known demerit: states sponsoring ABLE accounts can seek repayment from those accounts for the cost of care covered by Medicaid if the beneficiary dies. A properly written and implemented trust should not face that request.2,3
ABLE account contributions are not tax-deductible (though they are excluded from federal gift tax). That trade-off is made in exchange for tax-free earnings and tax-free withdrawals. Withdrawals go untaxed so long as the money is spent on “qualified disability expenses,” which can range from education, housing, and transportation costs to financial management and legal fees. Non-qualified withdrawals are subject to ordinary income tax and a 10% IRS penalty. Only one 529A account is allowed per disabled individual, while multiple 529 plan accounts can be opened to fund a child’s college education.2
The bottom line? ABLE accounts give families with special needs children a new way to save and invest for future needs and expenses.
You may also be interested in the following articles
- 6 Effective Retirement Strategies for Smart Women
- ABLE Accounts for Loved Ones with Disabilities
- Money Concerns for Those Remarrying
- Volatility Is Not Risk
- Saving Early & Letting Time Work for You
- How Can Women Save More for Retirement?
- Valuable Financial Tips That Women Should Apply In Their Lives
- What Women Shouldn’t Retire Without
- When a Minor is a Beneficiary
- How Can Divorced Women Achieve a Financially Healthy Retirement?
- Are Women Reluctant to Talk About Money?
- Aspects That Influence How Much Your CalSTRS Benefit Will Be Each Month
- You Retire, But Your Spouse Still Works
- Putting Your Tax Refund to Work
- Planning for Retirement When You Are Single
- White House Proposes Changes to Retirement Plans
- Making Investment Decisions
- Who Has to Pay the Debt after You Die?
- How to Get Started with Financial Goal Planning – The Basics
- Smart Financial Moves in Your 20s, 30s, 40s & 50s
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - autismspeaks.org/advocacy/federal/able [12/25/15]
2 - nolo.com/legal-encyclopedia/new-savings-accounts-able-disabled-people.html [1/20/16]
3 - nytimes.com/2016/02/14/your-money/a-closer-look-at-529-able-accounts.html [2/14/16]