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New 529 Plan Created for People With Disabilities

Tax-friendly 529 savings plans no longer will be just for college.

Cute handicapped boy showing thumbs up outdoors

Legislation recently signed by President Barack Obama will allow states to set up similar savings programs to benefit those with disabilities without jeopardizing their federal benefits, such as Medicaid.

Money invested in an Achieving a Better Life Experience (ABLE) account — sometimes also called a 529A account — can be withdrawn tax-free to pay for qualified expenses, including education, housing, transportation, health care, employment training and legal fees.

“It will do a lot of things for the disability community,” says Mark Priceman, vice president of marketing and communications for the  National Down Syndrome Society. “It’s giving them the financial freedom of independent living.

“A lot of people don’t realize that people with Down Syndrome want the same things they wanted at 18 years old … or at age 21,” Priceman says. “They want to get out of their [parents’] home, too.”

Generally, people with disabilities are disqualified from federal benefits such as Medicaid if they have more than $2,000 in assets. Many families have set up so-called special needs trusts, allowing them to set aside unlimited sums for a child’s expenses not covered by government disability benefits.

However, families must spend a few thousand dollars for a lawyer to set up a special needs trust, and the trust doesn’t have the automatic tax advantages of a 529 plan, says Chris Chen, a financial planner in Waltham, Mass.

An ABLE account, he says, will be more cost-effective, particularly for small contributions.

“For many middle-income Americans, it’s a great thing. A lot of literature around special needs trusts assumes you are able to contribute a lot of money,” Chen says. “That is not the case for most people.”

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Advocates lobbied for eight years for passage of this legislation. With an ABLE account,  families will be able to set aside thousands of dollars to be used to enhance the life of a beneficiary without losing valuable federal assistance.

As with 529 college plans, if the money in the ABLE account is used for nonqualified expenses, the earnings will be subject to regular income tax and a 10 percent penalty.

ABLE accounts will have some other limitations that don’t apply to college 529 plans:

  • The accounts will be available only to those whose disability occurred before the age of 26. The account can’t be used by someone, say, who develops dementia late in life.
  • A person can be a beneficiary of only one account. And no matter how many family members contribute to it, the most that can be salted away each year in the account is equal to the annual gift tax exclusion — currently $14,000.
  • Those whose account balances exceed $100,000 will see a suspension of Supplemental Security Income, though not Medicaid. Once the balance falls below $100,000, SSI benefits will resume.
  • Beneficiaries must belong to their home-state plan. If there isn’t one, they can participate in another state’s ABLE program if both states have agreed.
  • Money left over in the account after the beneficiary dies could be claimed by the state to recoup expenses paid by Medicaid.


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ABLE accounts can be established starting in 2015, although it’s up to states whether they do so. Some, such as Pennsylvania, Maryland and California, are already looking at setting them up, says Priceman of the National Down Syndrome Society.

States will be able to impose their own additional rules for ABLE accounts, as they do now with 529 college plans. About half the states, for instance, give residents a tax deduction for contributing to their home-state 529 plan. And states limit total lifetime contributions to 529s, in some cases maxing out at $350,000.

This expansion of the 529 program is only fair, Priceman says. Parents have long been able to use 529 accounts to save for a child’s education. Yet if they also have a child with a disability who is not going to college, they haven’t had a similar tax-favored way of saving for that child’s future, he says.

They will now, with ABLE.

Photo: Karelnoppe/iStock

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