By: Joseph Goldy, AAMS®
According to the CDC, approximately 61 million people, or 1-in-4 adults in the United States, live with a disability. 529 Able accounts were designed in 2014 to offer people with disabilities a way to save in a tax-efficient manner while also being used for various expenses.
Before the legislation that created Able accounts, individuals living with a disability had few savings options. Special needs trusts could be costly and are not well suited for everyday expenses such as food, employment support, training, and transportation.
Eligibility for 529 Able Accounts
For an individual to be eligible for an Able account, both of the following criteria generally need to be met.
The onset of the disability occurred before attaining the age of 26 (No age limit on when someone can establish an Able account.)
Eligible to receive Supplemental Security Income or Social Security Disability Insurance*
*If you are not receiving SSI or SSDI, you may still be able to establish an Able account if you obtain a letter of disability certification from a licensed physician.
How Do Able Accounts Work?
Able account contributions are made on an after-tax basis, growing tax-deferred within the account. When used for qualified expenses, withdrawn funds are tax-free as well.
In addition, anyone can contribute to Able accounts, allowing friends, employers, and family members to add funds on behalf of the beneficiary.
As we wrote in 2018, 529 Able accounts were also the first of their kind to provide disabled individuals a way to accumulate assets while not violating the federal means test and jeopardizing government benefits.
However, Able account balances above $100,000 may suspend government-paid SSI payments, although Medicaid will continue. The government will reinstate SSI payments should the balance fall below $100,000 in the future.
Like 529 college savings plans, 529 Able accounts are administered at the state level and may offer additional tax benefits depending on where you reside. Savingforcollege.com is an excellent resource for additional plan information and comparisons.
The Tax Cut and Jobs Act of 2017 introduced several lesser-known provisions within the accounts.
529 Plan Rollovers
One significant change that the TC&J Act introduced was that an individual can now rollover up to $15,000 (2021) from a 529 college savings plan into an Able account through 12/31/2025. This rollover can come from the beneficiary's own 529 college savings plan or a member of the same family.
The maximum amount that the beneficiary can rollover is the net of any contributions into the account. So, for example, if a grandparent contributes $5,000 into their grandchild's Able account, the child could still rollover $10,000 for that tax year from a 529 college savings plan that was also in the child's name.
The 529 rollover feature is a welcomed addition that the government will hopefully extend beyond the 2025 sunset date. Parents with assets in a 529 plan may find that an Able account better suits their needs for education at a specialized school or paying for regular expenses associated with living with a disability.
On this point, 529 college savings plans will waive the 10% additional tax on earnings if the withdrawal is for a designated beneficiary that is disabled. You can find more information within IRS Publication 970.
Higher Contribution Limits
As noted, the maximum a person can contribute to a 529 Able account is usually $15,000 per year. However, the TC&J Act legislation now allows the designated beneficiary of the Able account to contribute an additional amount up to the lesser of their compensation for the tax year or the current year's federal poverty line for a one-person household ($12,880 2021).
For instance, a disabled individual who earns $50,000 in 2021 would be eligible to contribute $27,880 into their Able account ($15,000 regular contribution amount + $12,880 maximum additional based on federal poverty level). However, please note that if the designated beneficiary's employer makes contributions on their behalf to a workplace retirement plan, the IRS eliminates this additional contribution amount.
Saver’s Credit
Individuals who meet the criteria for the Saver's Credit are now eligible to claim this credit for a portion of their contributions to an Able account. The Saver's Credit is for people who are over 18, not claimed as a dependent on someone else's return, and not a student.
The credit maximum is 50% of the first $2,000 in contributions to retirement accounts such as IRAs, 401(k)s, and now Able accounts. The maximum credit is $1,000 if filing as an individual ($2,000 married filing jointly) and begins to phase out at AGI of $19,750 for individuals ($39,500 MFJ).
With the fact that 26% of the U.S. population is experiencing some form of disability coupled with the fact that the costs of living with a disability are often higher, Able accounts could provide a needed source of income along with potentially tax-free growth.
Joseph Goldy, CFP®, is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ at Highland Financial Advisors, LLC, a fee-only fiduciary wealth advisory firm based in Wayne, New Jersey.
Joe specializes in working with newly independent women because of divorce or losing a spouse. He understands firsthand the value of having a clear financial picture pre- and post-divorce and a plan to restate goals as a single person. When he is not helping clients, Joe enjoys spending time with his two sons outdoors and volunteering to help raise money for Type 1 diabetes organizations.