Twenty-five
years ago, the Americans with Disabilities Act was signed into law, guaranteeing
disabled Americans – people with mental, physical, or emotional disabilities – equal
opportunity in employment, transportation, government service, and public
accommodations. The most recent statistics show about one-in-four Americans has
a disability. Many are children with special needs.1 So, it seems an
appropriate time to celebrate the advent of 529 Able accounts.
They’re
not available yet, but the federal government authorized states to create 529
Able accounts – tax-advantaged accounts for disabled individuals – in December of
2014 when the Achieving a Better Life Experience (ABLE) Act was signed into law.2
So far, 40 states and the District of Columbia have either passed laws making
the accounts possible or have legislation pending. Able accounts are expected
to make their debut during 2016.3
Able accounts are
for disabled beneficiaries
When
529 Able accounts become available, parents, grandparents, and others may
contribute up to $14,000 each year per beneficiary. The accounts must be set up
to benefit a beneficiary who became disabled before reaching age 26. Any
earnings in the account grow tax-deferred, and distributions are tax-free as
long as they are used to pay qualified expenses for the beneficiary. These may
include:2, 4
·
Education
·
Housing
·
Transportation
·
Employment
training and support
·
Assistive
technology and personal support services
·
Health
care
·
Financial
management
·
Legal
fees
·
Funeral
and burial expenses
Similar
to 529 college savings plans, distributions for non-qualified expenses may be
subject to income taxes and a 10 percent penalty. In addition, the designated
beneficiary can be changed to another family member with a qualifying
disability.4 However, any assets remaining in a 529 Able account
after the death of the beneficiary may be forfeited to repay benefits received
after the account was opened.3, 4
Exempt from public
benefits limits
One
of the most significant benefits of 529 Able accounts is money held in the
account is exempt from public benefit limits.2 If you have a family
member who suffers from a disability, you’re probably familiar with the
eligibility limits imposed on individuals who receive public benefits. For
example, a disabled individual who receives Medicaid or SSI income benefits can
have no more than $2,000 in assets.2, 5 The New York Times described it like this:3
“The account can grow to $100,000 without
jeopardizing federal benefits (although some states may set much higher overall
total contribution limits), but balances over that amount may prompt a
suspension.”
Just
one 529 Able account can be established per beneficiary, and it must be set up
through the program established and maintained by his or her state.6
How does a 529 Able
account compare to a special-needs trust?
Both
special needs trusts and 529 Able accounts are established for the benefit of a
disabled person and can provide financial assistance without jeopardizing
public benefits.
However, each offers some distinct advantages. For instance, special needs
trusts:6
·
Have
no contribution or accumulation limits.
·
Can be established for beneficiaries of any age, no matter the
age they became disabled.
·
Have no benefits payback requirement when the beneficiary dies.
On the other hand, 529 Able accounts are expected to offer tax
advantages. Distributions from 529 Able accounts for qualified expenses are
tax-free, while distributions from special needs trusts may be taxable to beneficiaries.
In addition, trust income that is not distributed from special needs trusts will
be taxed as well.6
Able accounts may offer cost benefits, too. It is unclear at
this point exactly what the fees for opening, maintaining, and investing a 529
Able account will be since each state will have its own program and costs. If
program fees are similar to those of 529 college savings plans, 10-year costs
on a $10,000 investment could range from zero to $2,277 (plus an annual account
fee ranging from zero to $25).7
Likewise, the cost of setting up a special needs trust is
variable. It depends on your attorney’s fees, your trustee costs, and the
complexity of the trust. Typically, setting up a trust costs a few thousand
dollars.8
Making sure a child with special needs has the financial support
he or she may need is a complex, challenging, and highly personal pursuit. Many
families rely on a team of professionals, including financial advisors, trust
attorneys, and others to help ensure they have an effective plan in place.
Greg
Womack, CFP
(405)
340-1717
Sources:
2 http://www.investmentnews.com/article/20150202/FREE/150209991/meet-the-529-able-account-a-new-way-to-save-for-disabled (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/Oct_2015_InvestmentNews-Meet_the_529_ABLE_Account-Footnote_2.pdf)
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