The Achieving a Better Life Experience (ABLE) Act was signed into law in December of 2014 to help disabled Americans and their families save money for future expenses (e.g. college) without losing their private insurance and state/federal benefits.
As the advocacy of the special need’s community continues to be a major focal point in financial planning, ABLE Accounts (aka 529As) have become an extremely useful tool for families in their care for a disabled person.
ABLE accounts carry many similarities to traditional 529s and special needs trusts. However, there are key differences that may make an ABLE more appropriate for your family than either of the aforementioned accounts.
Key Differences Between ABLE and 529 Accounts
First and foremost, in order to utilize an ABLE account, an individual must meet the terms of eligibility.
To be an eligible beneficiary, an individual must meet the following qualifications:
- The individual must be diagnosed with the disability prior to their 26th birthday
- The disability is expected to last for 12 months
- The individual must be receiving Supplemental Security Income (SSI) and/or Social Security Disability (SSDI)
- If the individual is not currently receiving the benefits mentioned above but meets the rest of the requirements, they need to obtain a letter from a licensed physician that certifies the disability
To begin breaking down how ABLEs work, we can compare the tax treatment of contributions, growth, and withdrawals to that of traditional 529s.
ABLEs and 529s are state-administered plans meaning that contributions to either are not federally deductible. However, contributions may be state income tax-deductible depending on the legislation of your residential state. Check your state government’s website or contact a local tax advisor to get more information.
Once money is in an ABLE or a 529 it can be invested, and all the growth is tax-deferred. The biggest advantage of either type of account comes in the withdrawal phase. Withdrawals that are made for qualified expenses are tax-free. However, therein lies a major difference between ABLEs and 529s; what expenses are considered qualified?
Traditional 529s are called college savings accounts for a reason. A qualified expense meriting a tax-free withdrawal from a 529 includes expenses listed under IRC Section 529(d)(3) categorized as “qualified higher education expenses.” Some common examples of these are tuition, supplies, fees from a higher education institution, etc.
In contrast, qualified expenses for ABLEs include all of the aforementioned and “qualified disability expenses”. Some examples of these include basic living expenses, health, housing, transportation, and assistive technology.
Qualified Withdrawals Not Counted as Income for Purposes of State/Federal Aid
Another key benefit of an ABLE plan is that those qualified tax-free withdrawals are not treated as income for purposes of qualifying for state and federal aid (similar to a Special Needs Trust).
According to savingforcollege.com, “Prior to the ABLE Act, if a person with a disability earned more than $700 per month or had savings or other assets in excess of $2,000, they risked having to forfeit eligibility for government programs like Medicaid.”
As a result, the only way families could save for disabled individuals, without disqualifying crucial benefits was via a special needs trust which can often be cost-prohibitive.
ABLE accounts now offer a way of saving that has a much easier barrier of entry. Put simply, you are not penalized for trying to save. Qualified withdrawals from an ABLE account are not only tax-free with the IRS, but also for means-testing for various government benefits (like Medicare, Social Security Disability Income Benefits, Supplemental Security Income, etc.).
Contribution Limits and Fine Print
The favorable treatment of ABLE funds does come at a cost: there are much stricter limits on the amount of money that can be contributed.
Whereas 529s have no annual contribution limits, ABLEs have an annual limit of $15,000. It should be noted that recent changes in tax code allow beneficiaries that earn an income to deposit an additional amount past the limit not to exceed the current poverty level.
Each state varies on the total contribution limits, but they all adhere to the rule that if an ABLE account balance exceeds $100,000, then the beneficiary will no longer be eligible for SSI benefits. Alongside this rule, if the listed beneficiary passes away, then states will be able to recoup some of the expenses through Medicaid via funds in the ABLE.
All of the above considerations work under the assumption of qualified contributions, tax-deferred growth, and finally qualified withdrawals.
But, what about in the case of non-qualified withdrawals?
There is one major difference between ABLEs and 529s when it comes to non-qualified withdrawals. Generally, if a withdrawal is made for a non-qualified expense in either account, you have to pay a 10% penalty and income tax on the earnings.
At first glance, this may imply that ABLEs – with the added flexibility of disability expenses – have an advantage. Traditional 529s, however, have an exclusion by which you can pull funds free of penalty if the beneficiary meets the IRS’ specific definition of disability (i.e. you are unable to perform any substantially gainful activity because of his/her physician’s diagnosed physical or mental condition which is expected to result in death or be indefinite duration).
It should be noted that even under this definition, a withdrawal from a traditional 529 only avoids the 10% penalty. Any growth withdrawn would still be subject to income taxation.
ABLE Accounts Are a Lifeboat for Many Families
Before the ABLE Act, there was little incentive to save for people with disabilities due to fear of losing crucial public benefits.
As a result, many disabled people have ended up living below the poverty level. Now, with awareness rising and tax laws changing, new options to prevent this sad truth have come to light. The introduction of ABLE accounts, the ability to transfer 529 funds into ABLEs, and the addition of defined “qualified disability expenses,” has given long-suffering families a lifeline.
But with all new options comes new information and new obstacles that have to be overcome through effective planning.
The goal of this article is not to simply pit ABLE Accounts vs. 529s. Rather, we want you, as parent and consumer, to be fully educated on these options so that you can make informed decisions and work towards your goal of providing for your family with confidence.
Our College Funding Coach team has worked with families, attorneys, and tax-advisors countless times to assist with precisely these kinds of decisions and form plans accordingly. The cost of higher education is a daunting proposition. We are here to help! if you have questions, wish to learn more, or would like some help, then please don’t hesitate to reach out and let us know!
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