A 529 ABLE Account Just Might Help...

Hey Pete and Damian! Got a 529 question for ya....

What if you have a 529 fund for a child who later develops a disability and is unable to attend college? Say autism or other severe learning disabilities. Can this be converted into a fund to support the disabled person or must it be transferred to another child to avoid penalties for withdrawing for non education expenses?

I am sure this varies state to state. Looking forward to your response. Thank you.

Diane D.

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Diane! Hey! We've got something for you:

529 College Saving Accounts are great tools to prepare for the inevitable costs associated with higher education. However, situations arise when the money you’ve set aside for college isn’t needed, but you’d like to avoid paying taxes and penalties. Is there anything you can do?

In this specific instance asked above, yes there is.

In 2014 the Achieving a Better Life Experience (ABLE) Act was passed to allow Americans with disabilities (and their families) the opportunity to save up to $15,000 per year in a tax-deferred account for future needs related to their disability and to supplement government benefits.

ABLE accounts, also known as “529 A accounts”, are similar to 529 College Saving Accounts in that the contributions will grow tax-deferred and withdrawals will be tax-free when used for disability related expenses like housing, transportation, education, employment training, assistive technology, healthcare expenses, and financial management.

Eligibility for an ABLE account can be determined a couple of ways. First, if the person is already receiving benefits under Supplemental Security Income (SSI) and/or Social Security Disability Insurance (SSDI) they are eligible to participate in an ABLE account. Or, a licensed physician can certify that the individual is blind or disabled and provide a written diagnosis of their condition. Please note, however, the onset of the disability must occur prior to age 26 for eligibility.

Where ABLE accounts diverge (slightly) from their college saving account cousins is in funding. ABLE accounts have an annual contribution cap of $15,000. Additionally, ABLE accounts are administered by individual states who place their own limits on total allowable savings. You’ll want to check on your state’s specific cap as they range from $235,000 to $529,000. The money contributed can then be invested in designated investment options chosen by the state.

You can also fund ABLE accounts with money rolled in from 529 College Saving Accounts to the tune of $15,000 per year until January 1, 2026. In order to do this correctly the beneficiary on both accounts must match. Will the law change allowing rollovers from 529 College Saving Accounts beyond 1/1/26? I sure hope so.

If you’d like to learn more about ABLE accounts I encourage you to check out the National Resource Center’s website and their FAQ page. Additionally, when trying to prepare for the financial wellbeing of someone with special needs, it’s always a good idea to consult with an attorney who specializes in these matters. If you belong to a network/support group, fellow members are a great resource for attorney recommendations. If you think your family may benefit from creating and funding an ABLE account, please take your time to ensure it’s the best option for you and your family and will allow you to achieve specific goals.