The 529A Savings Plan for those with Disabilities

Mar 22, 2022

The “Achieving a Better Life Experience (ABLE) Act” was signed into law in 2014 and is designed to help those with disabilities save for a better quality of life without disrupting public benefits. Minors or adults diagnosed with a severe physical or mental disability before the age of 26 are eligible to establish an account. The individual must also be entitled to Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) through the Social Security Administration or possess a signed disability certification letter from their physician.

The 529A, also known as the ABLE savings plan, has similarities to the 529 college savings plans. But, rather than using the funds solely to pay for qualifying education expenditures, funds in the 529A account are used for current and future disability-related spending, including but not limited to housing, education, transportation, employment training and support, assistive technology, and personal support services. The IRS identifies qualifying expenses as those related to the beneficiary’s disability and helps maintain or improve health, independence, and quality of life. Withdrawals for qualifying expenses are not subject to income tax. However, distributions for a non-qualifying expense are subject to ordinary income tax, plus a 10% penalty tax on the earnings portion of the distribution.

Also, like 529 college savings plans, each state establishes and administers its 529A plan. Individuals can utilize any state plan; however, it’s important to pay attention to tax incentives that your state may offer, available only to its residents. These incentives could be an added benefit. Although, if your state’s plan is more expensive or doesn’t offer favorable investment options, another state’s plan may outweigh the tax incentive. Contributions to 529A accounts are made with after-tax dollars and can be invested in funds offered in the state’s plan.

529A contributions can be made by the beneficiary and/or others and must be made in cash (not securities). Contributions cannot exceed $16,000 per year (tied to the annual gift exclusion amount). This yearly maximum is a combined total from all contributing sources. Any contributions that exceed the annual maximum are subject to a 6% excess contribution penalty each year until the overage is removed from the account.

Funds in an existing 529A or 529 college savings account can be rolled into the 529A account once per year, subject to the annual contribution limit. In addition, 529A account holders can make contributions from earned income over the annual limit, but no more than the previous year’s federal poverty level ($12,880 for a single person or $17,420 for a household of two, etc. in 2021).

While the 529A program offers some excellent benefits, there are a few drawbacks that you need to be aware of:

  • SSI benefits will be forfeited if the 529A account value exceeds $100,000. Each state can establish its own 529A account maximum as several hundred thousand dollars. However, if the account value exceeds the maximum at any time, funding from SSI will be suspended until it falls back below that amount.

  • Medicaid benefits will be reimbursed at death. Any funds remaining in the account at the beneficiary’s death must be used to repay the state for any Medicaid assistance after the account was created. Any funds remaining after repayment to Medicaid would go to the post-death beneficiary named on the account (income taxes would be owed on the earnings portion, but the 10% penalty is waived).

Caring and helping with financial support for individuals with special needs can be complex. The 529A plan is a good savings vehicle to enhance the financial wellbeing of those with disabilities. If you plan to open or already have an account, ensure the 529A is used appropriately to avoid the loss of funding from state and federal aid programs.

About Us | Get the Bedel Blog | More 529 Plan Articles

Schedule a Consultation

We have helped our clients answer these questions and more. If you want a clear understanding of your financial future, and need help making changes to reach your goals, schedule a consultation and we can get started.

Schedule a Consultation

Recommended Articles

Image for Student Loan Forgiveness – What to Do With Extra Money

Sep 12, 2022

Student Loan Forgiveness – What to Do With Extra Money

While it will sound boring to some, paying off loans or...

Image for Indiana 529 Plan: 5 Common Questions

Aug 29, 2022

Indiana 529 Plan: 5 Common Questions

A 529 plan is an investment account mainly for...

Image for 529 Plans & Tax Time

Mar 22, 2022

529 Plans & Tax Time

Some (not all) contributions to your 529 account need to...

Image for Completing a FAFSA? These Easy Steps Can Save You Time and Money

Oct 18, 2021

Completing a FAFSA? These Easy Steps Can Save You Time and Money

Following these four steps will take some time, but...