Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
The 529A Plan: A New Tax Free Savings Option for Individuals with Disabilities
Published Date : October 21, 2016
In late 2014 the Achieving a Better Life Experience Act (ABLE) was enacted to enable states to create tax-advantaged savings programs for young people with disabilities under section 529A of the Internal Revenue Code. By 2017 many states, including California, will roll out state sponsored 529A plans (or ABLE accounts) similar to existing 529 education savings plans, though with the goal of helping to cover “qualified disability expenses.” Disabled individuals, their family members and friends will be able to contribute to a supplemental investment account that will grow tax-free. Withdrawals will also be free from tax and may cover a broad range of living expenses while not disqualifying one’s eligibility to receive important federal benefits. While the creation of a new vehicle like the 529A is welcome, it is important to understand both the benefits and the limitations of these plans to determine if it will be a valuable addition to a financial plan.
If the parents or grandparents of a disabled child have the resources to do so, they generally create a Special Needs Trust (SNT). The SNT allows grantors to set aside and protect assets for the child’s future, while ensuring those assets do not disqualify the child from receiving Supplemental Security Income (SSI) and Medicare benefits. In order to qualify for a 529A plan, the person would need to have become disabled by age 26 in addition to meeting the requirements of Titles II and XVI of the Social Security Act. The 529A is not a substitute for a Special Needs Trust, but rather a supplement to one since contribution and funding limits are not great enough to cover the full needs of a beneficiary over a lifetime. Contributions are limited to a maximum of $14,000 annually from all sources, while maximum funding will be limited to an amount similar to each state’s 529 plan limit, typically $350,000. Furthermore, it is important to note that if a 529A plan’s value is greater than $100,000 it could impact SSI and Medicare eligibility. Qualifying expenses include education, housing, employment training, transportation, assistive technology, basic living, health care, legal fees and financial management.
At first glance the limits placed on annual contributions and account maximum, as well as the restrictions on qualification to age 26, may lead one to wonder whether a 529A is worth pursuing; however, proposed amendments to the plan rules and regulations could improve their attractiveness. There are three pending bills, introduced during the current 114th U.S. Congress, which could increase their appeal. They include a proposed increase to the annual contribution limit, raising the age limit from age 26 to 46 to provide coverage for individuals disabled later in life, and the ability for existing 529 education plans to be rolled into 529A (ABLE) accounts. Regardless of how this plan evolves, as it stands, it is worth a conversation with your financial advisor and estate planning attorney to understand the nuances and to determine if a 529A plan would be a valuable supplemental funding source for your disabled child or young adult.
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