Many people have heard of college 529 savings plans. Every state has an option for its residents. Many states offer tax deductibility for contributions to their state plan if you are a resident. Some states even let you, as a resident, deduct contributions to any state 529 plan.
529 savings plans have taken center stage in the world of college funding, and there are now tons of online resources, guides, and tools to learn about and choose a 529 Savings Plan.
There is one 529 plan, however, that is not as well-known: the 529 A account, or ABLE account.
What Are ABLE/529 A Accounts?
The Achieving a Better Life Experience (ABLE) accounts or 529 A savings plans, introduced by the federal government in 2014, help those with disabilities (and their families) protect assets and save more money without affecting social security income, Medicaid eligibility, and other benefits.
The ABLE account works very much like a regular college 529 savings plan.
You make contributions with post-tax dollars; the account grows tax-deferred and qualified withdrawals are tax-free. There is no federal tax deduction, but some states do offer deductions.
What Makes the ABLE Different from a Traditional 529 Savings Plan?
- Eligibility. The ABLE account is geared toward individuals with disabilities and their families. It is designed to bolster the saving power of these individuals without hurting their much-needed benefits. Therefore, you must qualify for this account. You can find the eligibility requirements in this blog post.
- Qualified Expenses. The ABLE has a broader list of qualified expenses compared to a standard 529. The IRS refers to these qualified withdrawals as “qualified disability-related expenses.” This means that, in addition to the traditional 529 qualified expenses of tuition, room & board, and books/supplies, the ABLE account permits tax-free withdrawals for the following:
- Basic living expenses like food and clothing
- Assistive technology,
- Employment training and support
- Personal support services
- Financial management and administrative services
- Health care expenses (including prevention and wellness
- Contribution Limits. You can contribute up to $15,000 annually. This includes contributions by friends and family.
- Does Not Count on FAFSA. Assets within the ABLE account and qualified tax-free withdrawals are NOT counted against you in the federal financial aid formula. In other words, having and using an ABLE to pay for college does not reduce your eligibility for federal and state need-based aid.
Availability: Most, but not all, states have an ABLE 529 account available. The ABLE National Resource Center publishes an interactive map and rundown of all the plans here.
Many states allow anyone to open up a plan with them. Double-check that they are accepting non-residents.
Taxes & Investment Options: Every state has different tax requirements, fees, and investment options for the 529 ABLE account.
State Tax Deductions: Check to see if your own state offers a tax deduction for contributing to an ABLE Account. Many states are now allowing contributions to be deducted from their state tax return. Here are two fantastic resources where this information can be found:
Savingforcollege.com: “529 ABLE Accounts”
The ABLE National Resource Center: “Select a State Program”
The Asset Forfeiture Clause: The Only Major Con of the ABLE Account
There’s always a catch, right?
Called “Transfer to State” in the tax code, if the designated beneficiary dies, assets remaining in the account will be siphoned by the state to reimburse itself for the medical costs it incurred while making payments to the beneficiary.
There are workarounds for this issue. Talk to a financial advisor and/or tax expert who can walk you through possible solutions.
For more information on this, see this detailed article from savingforcollege.com.
Why ABLE Accounts Are So Appealing
The emergence of the ABLE account has made it possible for disabled people to set financial and educational goals and pursue them without fear of losing the assistance they needed to survive.
In the past, families felt stuck, with no real ability to improve their lives. SSI and Medicaid eligibility rules made it nearly impossible to save for anything. In fact, they essentially disincentivized saving. If the disabled person earned more than $700/ per month or had assets in excess of $2,000, they ran the risk of losing all of their social security income or Medicaid benefits.
My younger brother has cerebral palsy and hasn’t been able to save much during his life because of these rules. Many disabled people have had to either keep their savings in cash, in their house, or in a bank account of a person they trust like their parents or siblings. These options are riddled with risks.
The ABLE 529 account changed all of this. Now we just need to get the word out to everyone we know so they can take full advantage of this account. Please share this with friends and family who may need help!