May 29th is a notable day in our industry, as it serves as our annual reminder of how valuable Section 529 plans are for helping our next generation start off on the right foot, financially. Last year I wrote about 5/29 Day and outlined the importance of having a 529 College Savings Plan for our young ones, and how easy it is to start such an account. This time I want to focus on a different 529 plan- the 529ABLE (also referred to as the 529A, or ABLE account).
What is a 529ABLE?
The 529ABLE account is a tax-advantaged savings program that benefits individuals with special needs. They allow funds to be saved by, and used for, someone who may receive state and federal aid as a result of a disability. It is similar to a Roth IRA in that deposits are made with already-taxed dollars, they grow tax-free while invested in the account, and when it’s time to make a withdrawal, all eligible withdrawals are made tax-free! What’s more is, individuals are able to have as much as $100,000 invested in their 529A account and not have it affect SSI benefits! That’s not possible with any other account other than a Special Needs Trust.
Who can have a 529ABLE?
In order to be eligible to open a 529A plan the individual must satisfy 2 requirements:
- Their disability must have occurred before reaching age 26
- They must meet the disability requirements for SSI or SSDI, and either are currently receiving benefits or have a Disability Certification from their physician. The certification is documentation of a physician’s diagnosis and confirms that the individual meets the functional disability criteria in the ABLE Act. Disability Certifications are needed for individuals who either have a job and earn too much money to be eligible for benefits or is in the determination process.
Why haven’t I heard of this before?
It’s still relatively new. The 529ABLE came about as a result of the 2014 Achieving a Better Life Experience Act, and the first account wasn’t opened until 2016 because so much of the rules weren’t nailed down enough for investment managers to feel comfortable offering a plan before then.
What Can Withdrawals be Used For?
A 529ABLE is similar to a 529 College Plan in that tax-favorable withdrawals can be used for education purposes, but unlike the 529 College Plan, much more qualifies as a qualified expense. In general, withdrawals from the 529ABLE can be used to cover basic living expenses as well as recreational costs. This includes:
- Housing (including water/sewer, mortgage payments, insurance, property taxes, garbage removal, heating fuel, gas, and electricity)
- Employment and support services
- Education
- Assistive technology and personal support services
- Health prevention and wellness/Medical Expenses
- Transportation (purchase a vehicle or modify a vehicle)
- Recreation (Sporting events, clothing, dining out, and other items not covered by government benefits that increase quality of life.)
- Legal expenses
- Financial management and administrative services
- Food
- Funeral and burial expenses
Interestingly, food was recently added to the list of Qualified Disability Expenses. Although food is definitely a basic living expense it was missing from this list until March 2020.1 For ease in keeping up-to-date, you might consider working with a financial advisor who practices in this area specifically.
What Happens if a Withdrawal Is Considered Ineligible?
The earnings portion of an ineligible withdrawal is considered income for that year and is included in calculating one’s taxable income and an additional 10% penalty is also assessed on the growth.
How Can I Fund a 529ABLE?
Anyone can contribute to someone’s 529ABLE! There’s just one caveat, no more than $16,000 (2022 limit) can be contributed to the account per year, with the only exception being if the individual has a job and makes contributions to the account using their earnings. Only then can an additional $12,880 be contributed to the account. Similar to a 529 College Savings plan, deposits can be made by the account’s beneficiary (in this case, beneficiary means the person who will benefit from the account), friends, family members, employers, or even a Special Needs or Pool Trust. Just make sure that if someone wants to make a contribution the funds should be sent directly to the investment company, not to the beneficiary, or it will be counted as income!
There’s also another exclusion called the SEIE (The Student Earned Income Exclusion) that allows working students under the age of 22 to earn more than is typically allowable without any SSI or Medicaid deductions. The exclusion allows for earnings up to $2,040 per month and up to $8,230 per year.
Additional Benefits
Many states offer tax deductions for contributions. Wisconsin, the state I reside in, has a 529ABLE plan that was signed into law but the plan itself is still in development. Because it doesn’t currently offer its own 529 ABLE plan Wisconsin residents may apply for a state tax credit for any amount deposited into any other state’s ABLE account.3
Another tax benefit is called the Saver’s Credit. Workers who are at least 18 years old, are not claimed as a dependent or a full-time student, and have income less than a certain amount (in 2022 $34,000 for Single/$51,000 for HH/$68,000 Married Filing Jointly), can receive the Saver’s Credit if they contribute to an ABLE account.2
Possible Drawbacks to 529ABLEs
ABLE accounts have a few limitations to be aware of. One, is an annual contribution limit as described above. This is equal to the then-current federal annual gift exclusion amount. There is some flexibility to this number depending on the individual’s contributions, but in general, the annual maximum contribution limit can be somewhat stifling if you want to make a larger 1X contribution, or an inheritance was left to be directed to the account. Another limitation affects individuals who receive Social Security benefits. The total account value should not exceed $100,000 or there would be a temporary suspension on benefits until the balance drops below that limit. (Note that Medicaid benefits do not hinge on an account value, only Social Security.) Lastly, investment allocation changes within the account can only be made 2 times per year. Though this may seem odd, it’s actually the same as a 529 College Savings Plan, and is an improvement to the original law that only allowed one change per year.
Another possible drawback comes into play in the future. I often get asked “what happens if there’s money left over in the account at death?”. If this happens, first remember that funds can be used for any outstanding Qualified Disability Expenses incurred, as well as funeral and burial costs. If that doesn’t use the remainder of the account balance then Medicaid will take claim to the equivalent of the benefits they had paid since the ABLE account was opened. After that, any remaining funds are then distributed to the account holder’s legal beneficiaries. Personally, I feel that it’s more important that enough funds are there for the individual’s needs for the duration of their lifetime (which can often be more costly in the last few years of life, as it is with anyone), so I wouldn’t recommend trying to limit the account balance in the ABLE just to try to avoid any Medicaid claims later. Of course that is my personal opinion, you are free to disagree with me.
Why Do I Need a 529ABLE If I Already Have a Special Needs Trust?
Special Needs Trusts (SNTs) are a fantastic estate planning tool. They offer a place for large inheritances to go with Trustee oversight and management. Both SNTs and ABLE accounts allow for assets and income to benefit a disabled individual while keeping them qualified for most federal and state benefits. So why would you want to add a 529ABLE into the mix when you already have an SNT? Though they are similar, there are definite differences, some that make these two plans complement each other enough that they often work together in someone’s plan. One such example is regarding withdrawals. As stated above, a qualified withdrawal from a 529ABLE can include a mortgage or rent payment, heating fuel, property taxes, gas, electricity, water/sewer and garbage removal, whereas both Special Needs Trusts and Pooled Trusts are prohibited from spending money on such housing expenses.4 Another difference is on taxation of the underlying investments. Growth within an ABLE account is tax-free, which is not true of either an SNT or a pooled trust. All income within an SNT is taxable, which means both capital gains and dividends are taxed at the higher Trust tax rates. This can lead to Trustees being reluctant to make investment changes in attempt to avoid recognizing capital gains for fear of taxes. This can be dangerous as accounts may be left unbalanced and skewing more risky than is appropriate simply to avoid taxes on interest, capital gains, and dividends. For both of these reasons, and more, using both plans in conjunction is a great way to ensure most bases are covered, so to speak.
How Do We Get Started With a 529ABLE?
As mentioned above, Wisconsin has signed into law a 529ABLE plan but the actual investment plan itself is still in development. So for now, Wisconsin residents may apply for a state tax credit for any amount deposited into any other state’s ABLE account (subject to the Federal annual limits listed above). This is great news in that you can use most any other state’s plan and still get a state tax deduction. Just make sure the out-of-state plan allows non-residents, which is currently only true for 29 of the plans out there. For an updated list of the various state 529ABLE plans click here. If you are a Wisconsin resident and want to learn more about the Wisconsin 529ABLE plan you might check out the State of Wisconsin’s Department of Revenue’s ABLE site.
Though you will see you can set up an account online without the help of an advisor, you still may choose to partner with one simply so you can stay abreast of the various details, strategies, and changes. This is especially important as the 529ABLE plan is still in its infancy stage and new developments are frequently taking place.
Now that you’ve been introduced to the 529ABLE plan you are likely to see how valuable the plan truly is. And there’s no time like the present when it comes to starting one, because as mentioned above, there are annual contribution limits that can really stifle the ability to grow large enough account balances to be meaningful and influential in one’s life.
If you’re thirsty for more information, you might watch this video, where I present the 529ABLE plan along with an estate planning attorney, who presents on the Special Needs Trust. I’ve given this same presentation several times and am always reminded of what a gift this plan is to us and our Special Needs community. I truly believe this is an integral part of one’s ability to Achieve a Better Life Experience.
Sources
1 ABLE National Resource Center. ABLERNC.org. 28 April 2022.
2Retirement Savings Contributions Credit (Saver’s Credit). IRS.gov. 2 May, 2022.
32015 Senate Bill 21, 2015 WISCONSIN Act 55
4Neufeld, Jason. “Special Needs Trust Allowable Disbursements”. 29 August, 2019. ElderNeedsLaw.com.
This material is for use with the general public and is designed for informational or educational purposes only. It is not intended as tax, estate or investment advice. Lincoln Financial Advisors and its respective employees, representatives, and/or insurance agents do not provide tax, accounting, or legal advice. Individuals should consult an independent professional as to any tax, accounting, or legal statements made herein. CRN-4723010-050322