The ABLE Act: A 529 Plan for Children with Special Needs

Do you have a child who has special needs? Have you ever wished that there were a way to save for their future with a tax-free account – much like the 529 accounts that are used to save for a child’s college education? The recently-passed ABLE Act may be just what you’re looking for.

At the end of 2015, congress passed and the president signed a bipartisan bill called the ABLE Act that expands the current 529 college savings program to allow tax-free accounts to be used for children with a disability. Because a college education may not be a good fit for some children with special needs, the Able Act allows parents to save money in a tax-free account as long as the funds are used for certain types of expenses (“qualified expenses”).

Like the current 529 college savings plan, the federal law simply provides the framework for each of the states to create a program for their residents. States are expected to start offering the accounts by the end of 2016.

Who is eligible?

An account can be created for the benefit of an individual who is blind, receives Social Security Insurance benefits (SSI), or has a physical or mental impairment that results in marked and severe functional limitations that has lasted or is expected to last for a continuous period of at least 12 months. The disability must have occurred on or before the individual’s 26th birthday. This definition is substantially broader than the requirements for many other disability programs.

What are the tax benefits of ABLE accounts?

Funds in an ABLE account grow tax-free and are not subject to tax upon withdrawal if used for qualified expenses. States may impose their own state tax incentives in addition to the federal benefits.

What are qualified expenses?

Qualified expenses include education, housing, transportation, job training and support, assistive technology, health and wellness, financial management, and legal fees. This broad definition allows for substantial flexibility to address the needs of each individual child. Some children may end up going to college, while others may require substantial medical or therapeutic care.

Who can contribute?

Any person can contribute to an ABLE account; however, an individual can only serve as the beneficiary of one account.

Are there limits on contributions?

A maximum aggregate of $14,000 (or the applicable annual gift tax exclusion amount for the year) can be contributed to any one ABLE account in a year.

In New York, the maximum amount that can be contributed to any one ABLE account is $350,000 – the same limit that applies to college savings accounts.

What are the effects of an ABLE account on a beneficiary’s eligibility for government benefits?

Funds in an ABLE account have no effect on a beneficiary’s eligibility for Medicaid or other federal benefits, except that accounts over $100,000 may be considered in determining a person’s eligibility for SSI.

What is the effect of contributions on the gift tax?

Contributions to an ABLE account are considered gifts for purposes of the federal gift tax. Like contributions to a college savings account, contributions qualify for the annual gift tax exclusion.

Should you set up an ABLE account for your child?

An ABLE account could be a great way to save for your child’s future if he or she has special needs. Whether an ABLE account is right for your family depends on the severity of your child’s disability and your family’s financial circumstances. Because every family is different, you should consult with a lawyer or financial advisor to see if an ABLE account is right for you.

About the Author

Shannon McNulty

Shannon McNulty is the founder of Savvy-Parents.com and a lawyer in New York City who provides legal planning for parents with young children. Shannon received her J.D. from Georgetown University Law Center and her LL.M. in Taxation from NYU School of Law. She has also earned her CERTIFIED FINANCIAL PLANNER(TM) designation. You can learn more about Shannon and her firm at www.cityparentslaw.com.

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