Families with special needs children have a new
tax-deferred 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, ABLE accounts are run by states rather than the
federal government. These plans emerged after the passage of the Achieving a
Better Life Experience (ABLE) Act in 2014.[i]
ABLE accounts address an underpublicized financial
need. While some families
open college savings accounts, comparatively 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 the child
becomes an adult.
The money may not be there; at least, not as much of it as many
families hope. State agencies and nonprofit groups helping the disabled face
ongoing funding challenges, including 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 issues.
Financially and legally, what changes when a child
with special needs turns 18?
As an adult, a disabled person becomes eligible for Medicaid and monthly SSI
payments, provided they meet 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 person is ineligible for fundamental health care and income benefits.[ii]
ABLE accounts nicely address this dilemma. Money accumulated in a tax-advantaged ABLE
account does not count toward that $2,000 total. Even if funds in the account
exceed $100,000, the account beneficiary will still be eligible for Medicaid
(albeit, ineligible for SSI).1
How large can an ABLE account become? Current ABLE account maximums range from
$235,000 to $529,000 (limits vary per state). Account contributions can be made
by anyone.1,[iii]
What if the state you live in has no ABLE accounts? Consider opening an account in another state.
Some states allow out-of-state residents to participate in their ABLE programs.
(It is also worth noting that some states have lower ABLE account fees than
other states.)1,3
ABLE account holders have some new options, thanks to
federal tax reform. The Tax
Cuts and Jobs Act of 2017 brought notable changes for these accounts. While the
basic annual account contribution limit is currently $15,000 for an individual,
working ABLE account holders may now contribute employment income to their
accounts in excess of that $15,000 threshold, up to the individual federal
poverty level set for the preceding calendar year. In addition, some ABLE
account beneficiaries may be eligible for the Saver’s Credit, a sizable federal
tax break.1
You may now roll over up to $15,000 from a standard 529 plan into an
ABLE account. One key condition must be met: the beneficiary of the standard
529 plan must either be the same person who is the beneficiary of the ABLE
account or a member of the same family as the ABLE account holder.1
ABLE accounts are becoming an important component of
special needs planning. The
word worth emphasizing here is “component.” The money in an ABLE account alone
may not be enough to cover lifetime care expenses for a disabled adult, even if
the account is replenished. An ABLE account is usually not a financial “answer”
for families with mentally or physically challenged children, but a part of a
greater financial strategy that might include a supplemental needs trust or
other savings vehicles.
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. You cannot open
one for someone older than 26, unless the individual became disabled prior to
reaching 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.1,3
ABLE account contributions are not tax-deductible at the federal level
(some states do permit deductions). This tradeoff is made in exchange for
tax-deferred 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 job training and health care.
Nonqualified withdrawals, naturally, are taxable.1
The bottom line? ABLE accounts give families with children who have special needs a new way to save and invest for future needs and expenses.
To learn more about ABLE accounts or other services that CapSouth provides, vist our website at www.capsouthwm.com or call our office at 800.929.1001.
Investment
advisory services are offered through CapSouth Partners, Inc., dba CapSouth
Wealth Management, an independent registered Investment Advisory firm.
Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or
completeness of the information. This material
has been prepared for planning purposes only and is not intended as specific
tax or legal advice. Tax and legal laws
are often complex and frequently change.
Please consult your tax or legal advisor to discuss your specific
situation before making any decisions that may have tax or legal consequences.
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[i] https://www.finra.org/investors/learn-to-invest/types-investments/saving-for-education/able-accounts-529-savings-plans
[ii] https://mn.db101.org/mn/situations/youthanddisability/benefitsforyoungpeople/program2c.htm
[iii] http://www.ablenrc.org/what-is-able/what-are-able-acounts/
