As part of its 2014 year-end tax legislation activity, Congress passed the Achieving a Better Life Experience (ABLE) Act, which creates tax-favored accounts for individuals with disabilities.
Beginning in 2015, states will be allowed to adopt an ABLE program that mirrors many of the qualities of a traditional 529 plan. These “529A” accounts are intended to be a low-cost alternative to the establishment of special needs trusts.
About the new 529A account
Individuals with disabilities (or more likely, their parents or guardians) will be able to open one 529A account. To qualify, the beneficiary (the disabled individual) must have a significant disability that he or she was diagnosed with prior to reaching age 26, and that disability must be expected to last for at least 12 consecutive months.
Contributions:
- Contributions are limited to $14,000 per individual, per year.
- Contributions are ineligible for the five-year-averaging rules available to standard 529 college savings plans.
- Unlike contributions to traditional 529 plans, contributions to 529A accounts are irrevocable.
Distributions:
- Qualified distributions may be taken over the beneficiary’s lifetime to cover the costs of medical expenses, education, transportation, employment training and support, and housing.
- Nonqualified distributions will be subject to income tax on earnings, as well as a 10-percent penalty.
Additional features:
- These accounts typically will not disqualify the disabled individual from most state or federal aid, such as Medicaid or social security.
- Only the first $100,000 in the account is exempt from the Supplemental Social Security Income limit of $2,000, however.
- Funds remaining in the account when the disabled individual passes away will be used to repay the state for any benefits received under a state Medicaid plan.
- Also to be determined is what will happen to any remainderment assets in the account not claimed by the state.
In addition to the establishment of 529A accounts, the ABLE Act will allow traditional 529 plan owners to make twice-annual investment changes, rather than just one as has been the case historically. This change will apply to both 529 and 529A accounts beginning in 2015.
Although the legislation has been officially signed into law, the Department of the Treasury and the IRS have been given six months to develop regulations for these accounts. Additionally, states will need to implement their individual plans. As such, 529A accounts will likely be unavailable until the latter half of 2015, but they may certainly become an integral part of financial planning for some families with special needs children in the future.
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
For Registered Representatives: Mark Phillips is a financial consultant located at Mark Phillips & Associates, 19171 MacArthur Boulevard, Suite 225, Irvine, CA 92612. He offers securities as a Registered Representative of Commonwealth Financial Network®, Member FINRA/SIPC. He can be reached at (949) 333-6394 or at mark@phillipswealthmanagement.com.
© 2015 Commonwealth Financial Network®
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