New Legislation You Should Know: 529A ABLE Accounts

Late last year, Congress enacted new rules to improve the recently created 529A ABLE account, a tax-advantaged savings account for individuals with disabilities. Before we jump into the new rules, let’s briefly review the key advantages and distinctions of the account itself.

A Step Forward for Special Needs Planning

In 2014, Congress passed legislation to expand on the popular 529 plan for college savings, creating the 529A ABLE (or “Achieving a Better Life Experience”) account.
The new ABLE account was developed to provide parents the opportunity to save money in a tax-advantaged investment vehicle for children with special needs.

A typical 529 plan allows for tax-free distributions only if the beneficiary uses the funds for qualified education expenses. But if the beneficiary doesn’t have expenses from one of those qualified institutions, any earnings withdrawn from the 529 account are subject to taxes and penalties. For parents of children with special needs, this rule significantly limited the practical use of a typical 529 account.

In steps the 529A ABLE account, which, compared to the 529 plan, provides much more flexibility when it comes to withdrawals — distributions on expenses related to education, housing, health care, prevention and wellness are all tax-free. Like the 529 plan, ABLE accounts are administered by each individual state.

529 New Legislation - Benjamin Hayes_ABLE

Some of the key benefits include:

— A potential tax deduction for in-state plan contributions

— Tax-free growth, provided the funds are distributed for qualified disability expenses

— Exemption from the $2,000 limit on personal assets to qualify for Supplemental Security Income (SSI), Medicare and other public benefits

— A lower start-up cost compared to a special needs trust

At the same time, ABLE accounts also come with some limitations:

— The maximum account balance is $100,000

— To qualify, the beneficiary must be diagnosed with the disability before he or she reaches age 26

— The state can potentially recapture the ABLE assets upon the beneficiary’s death

The ABLE account does not replace the potential need for a special needs trust and advanced estate planning; however, parents can think of it as an additional tool to help care for their children.

The PATH Act Impact

Recently, Congress and President Obama passed the “Protecting Americans from Tax Hikes” (PATH) Act of 2015, which provided an important change for those considering a 529A ABLE account:

State Residency Requirement: Originally, a beneficiary could only open a 529A ABLE account in his or her home state — unlike typical 529 plans, in which beneficiaries can choose to participate in any state’s plan. This provision was initially included to help states recapture assets upon a beneficiary’s passing. The PATH Act removes this requirement, providing parents with more choice in their 529A decision. Hopefully, this change will provide more competition among states to pass legislation and launch their own ABLE programs, and eventually drive lower costs and increase investment options.

Unfortunately, a widely reported change involving rollovers of existing 529 accounts was not included in the final PATH Act legislation. Currently, existing 529 assets cannot be rolled over into a 529A ABLE account for the same beneficiary. The IRS has stated that this distribution would not constitute a higher education expense, and thus, it won’t permit such a transfer on a tax-free basis.

Today, 35 states (plus the District of Columbia) have enacted legislation to sponsor ABLE programs.1 Stay tuned — we hope to see these programs launched and up and running by 2017.

 

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional. Hewins does not provide tax, accounting or legal services.
Benjamin Hayes
Benjamin Hayes

CFP®, MBA | Senior Financial Advisor

Benjamin Hayes, CFP®, MBA, is a Principal and Senior Financial Advisor for Wipfli Hewins Investment Advisors in Green Bay and Appleton, WI. Benjamin specializes in comprehensive financial planning for major life transitions, focusing on retirement, tax and risk-management considerations.

No Comments Yet

Comments are closed

New Legislation You Should Know: 529A ABLE Accounts

time to read: 2 min