After having a child, our clients are often eager to begin
saving for their child’s future college education. For many parents, that means
opening a 529 College Savings Plan. However, what should parents do when their
child is born with or later diagnosed with a disability? What if their child’s
disability is severe enough to reduce the likelihood of him or her attending
college at all? Is there a way for those parents to save and provide for their
child with a disability?
Or, consider a working adult with a disability. If she saves
money for the future in a traditional retirement account like an IRA, Roth IRA,
401k, etc., she will lose access to government benefits once those account
balances exceed $2,000.
So how can a working individual with a disability save for his or her future?
Prior to the enactment of the Achieving a Better Life
Experience Act (ABLE Act) in 2014, the only way those parents or individuals
could save without jeopardizing eligibility for government benefits was by
establishing a special needs trust. Although establishing such a trust can be
an effective planning tool, it can be complicated and costly, especially for
small contributions or account balances. With the passing of the ABLE Act,
parents of children with disabilities can now save for their children’s future
in a tax-advantaged account, without putting their child at risk of losing
access to government benefits.
What is a 529 ABLE?
A 529 ABLE is a savings vehicle designed to help individuals
with physical and mental disabilities put aside money to pay for qualified
Like a 529 plan, money is contributed with after-tax dollars and, as long as
the money is used to pay for qualified expenses, the money grows tax-free and
is withdrawn tax-free.
A crucial benefit of ABLE accounts is that individuals may
accumulate up to $100,000 in an ABLE account without impacting their
eligibility for programs like Supplemental Security Income.
In addition, Medicaid eligibility is completely unaffected by contributions to,
savings in, or qualified distributions from an ABLE account. This is a critical
feature of the law for people with disabilities.
Under current law, an individual must have less than $2,000
of savings or other assets ($3,000 if married) to qualify for Medicaid or
Supplemental Security Income.
With an ABLE, disabled individuals can save up to the 529 limit for their state
($350,000 in Tennessee in 2018) while still being eligible for Medicaid and can
have up to $102,000 in savings before their SSI benefits start to be reduced or
What is a “qualified
expense related to the eligible
Some examples of eligible expenses are education, housing, transportation,
employment, training and support, assistive technology, personal support
services, health, prevention, and wellness, financial management,
administrative services, legal fees, expenses for oversight and monitoring, and
funeral and burial expenses. This list is not exhaustive and other expenses may
qualify as well.
Who is eligible?
Eligibility is inclusive of a wide range of disabilities, as long
as the disability occurred before the individual’s 26th birthday.
For example, if your child’s disability appears on one of the following three
lists, then he or she is deemed to be eligible to open an ABLE account: Social
Security Administrations (SSA) list of Compassionate Allowances,
SSAs List of Impairments for Adults (Part A),
or SSAs List of Impairments for Children (Part B).
Alternatively, if your child is eligible to receive SSI, SSDI, or has been
diagnosed by a qualified physician with a physical or mental disability
resulting in marked and severe functional limitations that is expected to last
no less than 12 months, then he is also eligible.
Accounts and Your Comprehensive Financial Plan
ABLE accounts are an inexpensive and effective way to save for
future expenses of a child or adult with special needs. However, they are
a replacement for special needs
For many children and their parents, an ABLE account will be insufficient on
its own and will need to be complemented with a special needs trust, as well as
other savings, investment, and insurance vehicles as part of the comprehensive
Anyone considering an ABLE should consult with an attorney and a financial
advisor to determine the best method for saving and investing funds related to
the individual’s specific needs.
Frequently Asked Questions
a 529 plan, the annual contribution limit equals the annual federal gift tax
exclusion amount ($15,000 in 2018).
However, unlike a 529, this annual limit applies to the aggregate of all
per donor. Thus, the aggregate total of all contributions from family members,
friends, and the disabled individual cannot exceed the annual gift tax
There is an exception, however, that allows individuals with
disabilities to save above and beyond the normal contribution limit. If they
have earned income from employment, the maximum amount of employment income
that can be contributed is the lesser of 100% of their compensation or the
federal poverty line threshold for a one-person household ($12,060 in 2018).
One condition is that beneficiary cannot also be contributing to employer
retirement plan. This new benefit allows people with disabilities the
opportunity to save for their future, without the age restrictions on
withdrawals that are in place for most retirement plans.
For the Tennessee ABLE, there are no application fees, sales or distribution
charges, maintenance, or advisor fees. The only fees are asset-based fees based
on the investment selection. For the Tennessee ABLE, the expense ratios range
It depends on the state-sponsored plan. The Tennessee
ABLE, for example, provides 14 investment options from Vanguard and Dimensional
Relatives, friends, or the individual with the disability.
are withdrawn for a non-qualified expense, the beneficiary will pay income
taxes on the earnings, as well as a 10% penalty.
Yes! The final Tax Cut and Jobs Act of 2017 (TCJA) permits
money in a 529 plan to be rolled over to a 529 ABLE account, without any
distribution penalties, as long as the beneficiary is the same person.
However, rollovers count towards annual gift exclusion amount ($15,000 in
2018), so large accounts will have to be moved over gradually.
Do I have
to use my state’s ABLE program?
No. Although some states restrict
eligibility to state residents, many state ABLE programs are available for
nationwide participation. The TN ABLE, for instance, is only open to state
residents. However, the Virginia 529 ABLE is available for nationwide participation.
contributions eligible for 529 state income tax deductions?
time, they are not eligible for this state income tax benefit. However, if the
individual with the disability makes contributions to an ABLE account, he or
she will now be able to claim the Saver’s Credit for those contributions on a
federal tax return.
[v] The exact federal definition is as follows: qualified disability expenses are “any expenses related to the eligible individual’s blindness or disability which are made for the benefit of an eligible individual who is the designated beneficiary.” See http://uscode.house.gov/view.xhtml?req=(title:26%20section:529A%20edition:prelim).
[viii] https://www.ssa.gov/disability/professionals/bluebook/ChildhoodListings.htm. Note that Autism Spectrum Disorder is specifically named on the SSAs list of impairments for children. Thus, any child diagnosed with autism is eligible to open a 529 ABLE.
[x] One major difference is that after the beneficiary’s death, states can seek repayment from ABLEs for the cost of care covered by Medicaid.
[xvi] To learn more about the saver’s credit, see https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit.
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