Everything You Need to Know About 529 Able Accounts as a Tax-Deferred Option
As a parent of a child with special needs, you may have considered or already set up a Special Needs Trust (SNT). These vehicles can help provide a better quality of life for individuals with special needs by paying for many day-to-day costs that are not covered by government benefits.
What many parents don’t realize, however, is that SNTs cannot pay for expenses that Medicaid and Medicare already cover without affecting benefit eligibility. This means that even with the help of a Special Needs Trust, individuals with special needs are still stuck with the bare minimum, government-approved level of food and housing. It’s a catch-22 situation that can make it incredibly difficult to provide the quality of life your child deserves.
That’s where 529 ABLE accounts come in.
What Is a 529 ABLE Account?
In 2014, the Achieving a Better Life Experience (ABLE) Act was passed and with it, the 529 ABLE (also known as the 529A) account was created. It allows individuals with special needs to save up to $16,000 per year in a tax-deferred account similar to a 529 college savings plan and it acts as a supplement to government benefits.
Like college savings accounts, it is a state-run savings program available for individuals with qualifying conditions diagnosed prior to age 26. It is the first account that a disabled individual can have in their name and not have it count as a resource for means-tested benefits. These accounts also provide tax benefits in the form of tax-deferred growth and tax-free withdrawals if they are used for Qualified Disability Expenses (QDE).
How Much Can Be Contributed?
ABLE accounts have a $16,000 annual contribution limit from all sources as of 2022. An individual with special needs who has earned income and is not participating in an employer-qualified retirement plan can contribute an additional $12,880 per year.
The first $100,000 accumulated in the account will qualify for an exemption from means-testing. Account values that exceed $100,000 will impact SSI, Medicare, and Medicaid eligibility.
What Are Qualified Disability Expenses?
An individual can use their ABLE account funds for anything that is considered a Qualified Disability Expense (QDE), including:
- Medical and health expenses
- Legal fees
- Financial management
- Employment training and support
- Assistive technology and personal support services
Any withdrawals made for QDEs will be tax-free and will not reduce eligibility for SSI (as long as the $100,000 account maximum is not exceeded). This makes an ABLE account an effective supplement to a Special Needs Trust when it comes to housing expenses. In fact, many individuals use funds from a 529A to supplement the housing payments provided by Medicaid.
It is important to note that states may assert a payback from the ABLE account upon the passing of the beneficiary. This payback applies to any Medicaid expenses paid by the state after the establishment of the ABLE account. Amounts paid by Medicaid prior to the establishment of the ABLE account are not eligible for reimbursement from the 529A.
Any funds remaining in the account after the individual with special needs passes could be subject to the State’s Estate Recovery Act.
Who Can Contribute?
Anyone can contribute to an ABLE account, including an individual with special needs or a friend, family member, trust, estate, or another third party. The only caveat is the annual contribution limit.
Certain rollovers are also permitted from other ABLE accounts or traditional 529 college savings plans.
Take the Next Step
ABLE accounts are a tool for supplementing Special Needs Trusts and improving the quality of life for your loved one. At Aviance Capital Partners, we have experience helping clients navigate important ABLE account decisions, including investment options and ongoing account monitoring. If you would like to learn more about ABLE accounts and how they can be used to benefit your loved one, we would love to hear from you! Reach out to us at firstname.lastname@example.org or click here to schedule a no-obligation phone call.
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