A New Savings Plan for the Disabled
529 ABLE Beneficiaries Will Still Qualify for Supplemental Security Income
January 11, 2015
A new type of savings vehicle for the first time offers the disabled and their families the benefits of tax-free growth.
Called 529 ABLE plans, the state-sponsored accounts, authorized by Congress in late 2014, resemble 529 college plans. In addition to offering tax-free growth, 529 ABLE plans will allow people with disabilities to save as much as $100,000 and still qualify for benefits including Medicaid and Supplemental Security Income (SSI), a federal program for disabled people with low incomes, says Sara Hart Weir, president of the National Down syndrome Society, which lobbied for the bill.
Previously, to qualify for SSI, a person could have no more than $2,000 in assets.
Of course, the new accounts aren’t for everyone. In particular, families who expect that there might be money left over that the disabled person doesn’t use should carefully weigh the pros and cons of 529 ABLE accounts versus so-called special-needs trusts, says Michael Kitces , director of research at Pinnacle Advisory Group in Columbia, Md.
Blind or Disabled
To qualify for a 529 ABLE plan, a beneficiary must have been blind or disabled before age 26 and either be entitled to SSI benefits or have a doctor’s certification of blindness or a “physical or mental impairment which results in severe functional limitations,” according to a summary of the law prepared by Len Weiser-Varon, an attorney who specializes in municipal finance in Boston.
In many ways, the new 529 ABLE accounts, which state legislatures are expected to start authorizing this year, resemble 529 college-savings plans. A disabled person or friends and relatives can use them to make one-time or regular contributions, which grow tax-free if they’re used for “qualified expenses” that include education, housing, transportation, employment training, legal fees and funeral expenses. (If used for other purposes, investment gains are subject to income tax and a 10% penalty.) The account owner—or a person appointed to make decisions on his or her behalf—will pick from the plan’s investment options. Currently, the average cost of a 529 college-savings investment is 1.1% a year, according to Morningstar.
But in other ways, these accounts will differ from college 529s. For example, while families who open 529 college-savings accounts are free to select a plan offered by any state, those with 529 ABLE accounts must use the plan offered by the state in which the beneficiary resides.
Moreover, beneficiaries with 529 ABLE accounts won’t be able to amass as much savings as those with 529 college-savings accounts. That’s because annual contributions to 529 ABLE accounts are currently capped at $14,000, and each beneficiary is restricted to just one such account—limits that don’t apply to 529 college-savings accounts.
Another important difference between 529 ABLE and 529 college-savings accounts: Parents, grandparents and others who set up college-savings 529s can be the account owner and retain the right to take their contributions back, provided they pay income tax and a 10% penalty on the earnings. But those who contribute to 529 ABLE accounts will be making irrevocable gifts.
Perhaps the biggest downside to an ABLE account applies to beneficiaries who receive Medicaid. If they die with money in these accounts, their estates must repay the state for benefits they received after creating the ABLE account.
Contrast With a Trust
For families that can fund a special-needs trust (also called a supplemental-needs trust), deciding whether to use that or a 529 ABLE account—or both—is complicated. Because these trusts typically cost from $2,000 to $5,000 to set up, they often make sense only if there is more than $50,000 available to fund one, says Steven Cohen , a specialist in disability law in Boston.
While 529 ABLE accounts offer tax-free growth, investment gains in trusts are subject to income tax. A special-needs trust allows disabled people or their families unlimited contributions without affecting a beneficiary’s eligibility for government benefits. But once an ABLE account balance exceeds $100,000, SSI benefits are suspended. Moreover, when the beneficiary dies, a special-needs trust isn’t required to reimburse the state for Medicaid benefits—unless the beneficiary funded the trust with his or her own earnings or savings.Back to the Previous Page