22 June 2016

Many people know “529” accounts are available as a tax-advantaged way to save money for higher education. If you’ve been reading this blog you also know I am a BIG fan of the 529 college savings programs, even though there are some pitfalls 529 investors need to watch out for when taking money out of a 529 to pay for college expenses.

What I suspect many people don’t know, however, is that in December 2014 Congress expanded authorities under Section 529 for states to establish another type of tax-deferred savings program. This program is for people with disabilities. It’s called the 529 ABLE program – and I like it just as well as the 529 College Savings programs. Maybe more.

Couldn’t they give it a different name? Why Is It Called a “529”?

When Congress creates a tax (or a tax break), they will usually give it a name like “The Affordable Care Act” or “The Child and Dependent Care Credit”. If the media picks up on it, the name sticks. When they don’t we tend to default to calling it by the section of the Internal Revenue Code (IRC) that was added or modified to create it. For example, if I ask people if they have an “employer-sponsored retirement plan” they usually look at me with a blank stare. If I ask “do you have a 401K?” they know exactly what I mean. (Modern employer-sponsored retirement plans were created under section 401K of the IRC.)

The Affording a Better Life Experience (ABLE) Act was passed by congress in December 2014. It didn’t get much news time, so the name didn’t stick. The ABLE Act was passed by expanding state authorities under Section 529 of the IRC – the same section that authorizes states to establish tax-qualified accounts for college savings. Thus, we default to calling them 529 ABLE accounts. (I’ve seen them called “529A” accounts in a few places. Perhaps that will ultimately stick as a name.)

Why Did We Need 529 ABLE Accounts?

The primary issue being addressed by Congress was that many people with disabilities end up requiring social services (Social Security Income, Social Security Disability Insurance, Medicaid, etc.) to get by. Many social services are “means tested” – if you have money or assets, you don’t qualify to receive benefits under the programs. This created a disincentive for people with disabilities to save for their future. Sticking a few thousand in a retirement account could cost you tens of thousands in social services support. Wealthier families could create complex trusts to support a disabled child or relative without jeopardizing their access to social services, but most families either skirted the law by (illegally) keeping assets in someone else’s name or just not saving anything at all for the person with a disability.

That’s where the 529 ABLE account comes in. A person with a disability (or their family) can now save money in a tax-deferred account without it impacting their access to social services*. It’s a great incentive to be independent and self-supportive.

How Does It Work?

Each state will develop its own 529 ABLE program, so there will be variations among the individual programs offered by each state. They must all follow the IRS guidance, however, so there will also be a lot of common ground. Some states are making their program available nationwide. You don’t necessarily have to be a resident of a particular state to participate in their 529 ABLE program.

To be eligible for a 529 ABLE account an individual must meet one of the following criteria:

  1. Be entitled to receive Social Security Income (SSI) because of a disability
  2. Be entitled to Social Security Disability Insurance (SSDI)
  3. Have a condition listed by the Social Security Administration as a Compassionate Allowance Condition
  4. Self-certify their diagnosis and disability

If you are eligible, you can open a 529 ABLE account. Once the account is open, up to $14,000 can be deposited to it annually as long as the total account balance is below the state’s established limit. Ohio has the first 529 ABLE program, and their established account limit is $426,000. If you have an Ohio ABLE account and the balance is greater than $426,000 no further contributions can be made to the account until the balance is below $426,000. That’s a generous limit. Not one most individuals will need to be concerned with. Other states may have other limits. The $14,000 annual limit is on the account, not the contributor. Total annual contributions from all sources cannot exceed $14,000.

Withdrawals (tax geeks like the word ‘distributions’, but it means the same thing as a withdrawal) from the account are tax free as long as the money is used on expenses meeting the following criteria:

  1. The expense was incurred at a time the individual was disabled
  2. The expense relates to the disability, and
  3. The expense improves the health, quality of life, or independence of the disabled individual

Fortunately, the IRS guidance on the 529 ABLE accounts made a very broad interpretation of the above rules. 529 ABLE withdrawals can be used for housing, transportation, employment support, healthcare & wellness, legal fees, financial management, oversight, communication services, etc. Just about anything that supports the life and well-being of the disabled person qualifies as a legitimate expense.

BrothersThis is a really great program for taxpayers with disabilities. My brother, Tom, has Down Syndrome and our family has been chomping at the bit for the 529 ABLE program to come online since the law was passed by Congress in 2014. Although Tom has been working and saving for nearly 30 years, we didn’t want his money in a retirement account (like an IRA) because we are concerned he may need the money before he is 59 ½ - the minimum age for withdrawal without tax penalties.

Tom is a resident of Ohio, and we were lucky that Ohio had the first 529 ABLE program made available to the public. I reviewed the program and was very satisfied with the job Ohio had done in terms of simplicity, value, and convenience. We started moving Tom’s assets into his Ohio 529 ABLE account just a few weeks ago.

Virginia is scheduled to roll out their 529 program later this summer. You can expect me to review it when it does. In the meantime, if you want additional information about 529 ABLE accounts, please contact me.

*Individuals receiving SSI should be aware that once the balance of the account exceeds $100,000 it starts to impact SSI eligibility. The first $100,000 is discounted, but above that eligibility is impacted. If the account balance is $102,000 then $2,000 is counted as an asset toward SSI eligibility.