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529, ABLE or both for your child with a disability?

Updated: Apr 29, 2022

When my sons are not playing video games, they like things with wheels. Last summer, we got them larger mountain-type bicycles. They each have a scooter and my older son has a skateboard as well. All items with wheels achieve the same basic goal of moving the user between two points faster than s/he could go on foot. But you would not want to take a scooter on a 15-mile trail or do tricks on a long-distance mountain bike—although my older son has proposed doing both. He has also proposed acquiring two more wheeled items: a BMX bike and a different kind of skateboard, which are both, he assures me, necessary for trick riding and inline skates. In terms of locomotion, it is common to have items that share a basic structure—for example, a frame and wheels—but are designed for different purposes. The same is true with financial instruments. (Photo by Oleg Gospodarec, via Unsplash).

Achieving a Better Life Experience (ABLE) accounts are also known as 529A accounts, because they were created and are governed by a sub-section of the same part of the Internal Revenue Service code that created and governs 529 college savings accounts. As a result, the two types of accounts share certain beneficial tax features, such as a possible state tax deduction for contributions (state dependent), tax deferred investment growth, and tax-free withdrawals when the account funds are used to pay particular expenses. With the increasing number of post-secondary education programs, available for youth with intellectual, developmental, behavioral health and other disabilities, my clients are asking more frequently to compare the pros and cons of using a 529 plan with the pros and cons of using either a 529A or an ABLE account to save for the future for their child with a disability. Not surprisingly, either or both may be beneficial, depending on the specifics of the child and also the family situation. We will begin by looking at the relative strengths and weaknesses of each kind of account.

ABLE Account Strengths:

  • An ABLE account is one of the few ways that a person with a disability, who receives either Supplemental Security Income (SSI) or Medicaid (including Medicaid-wavier funded services) or both, can accumulate funds in excess of $2,000 and maintain control over those funds.

  • ABLE account funds are easy for the beneficiary to access directly, using a debit card.

  • Investment earnings on funds, contributed to an ABLE account, are not considered income to the owner/beneficiary.

  • A working person, who is the owner/beneficiary of an ABLE account and who does not contribute to an employer retirement plan, is permitted to contribute up to an additional $12,000 to her/his ABLE account. This makes the maximum ABLE contribution for a working person higher than the maximum 401(k) contribution. Note that there is no federal income tax deduction for contributing to an ABLE account.

  • ABLE distributions are never considered income to the owner/beneficiary, regardless of the use to which the distribution is put. However, distributions for expenses, other than qualified disability expenses, may have tax consequences.

  • Although the beneficiary with a disability is also the owner of her/his 529A account, assets in the account are not counted for the purposes of the Free Application for Federal Student Aid (FAFSA).

  • Funds in an ABLE account can be withdrawn tax-free for any “Qualified Disability Expense”. Despite what it sounds like, the QDE category is quite broad and includes: education, housing, transportation, employment training and support, assistive technology, personal support services, health prevention and wellness, financial management, administrative services, legal fees, expenses for oversight and monitoring and funeral and burial expenses, and really anything that can assist the owner/beneficiary with increasing and/or maintaining their health, independence, and/or quality of life.

  • · Funds paid from an ABLE account for food and shelter expenses are not considered “in-kind support and maintenance”, and do not reduce a recipient’s SSI.

ABLE Account Weaknesses:

  • Generally, in order to open an ABLE account, the owner/beneficiary must have a level of disability that meets the Social Security definition, whether or not s/he is actually receiving disability benefits.

  • As of now, a person cannot open an ABLE account if their disability started after they turned 26.

  • If the owner/beneficiary with a disability dies without using all the money in the account, Medicaid has first claim on the remaining assets to the extent that the owner/beneficiary made use of any Medicaid-funded health care or support services.

  • An ABLE account can only be transferred to another beneficiary with a level of disability that meets the Social Security definition.

  • Funds can be “rolled” from a 529 college savings account to an ABLE, but not the other direction.

  • A person can be the owner and beneficiary of only one ABLE account.

529 Account Strengths:

  • Investment earnings, generated within a 529 plan, grow tax-deferred; and the funds may be withdrawn tax-free to cover qualified educational expenses.

  • You can change the beneficiary on a 529 plan to any qualifying family member. Qualifying family members include the: spouse, child (biological, legally adopted, step, or foster), child’s descendant, sibling (including step), in-laws (mother, father, sister, brother), father or mother (including step), or ancestor of either, niece, nephew, or spouse thereof, or first cousin or spouse thereof.

  • Generally, 529 accounts are not an asset, owned by the student/beneficiary, but rather by the parent(s) or grandparent(s) that set up the account. The FAFSA process expects parents to contribute up to 5.64% of non-protected assets, whereas students are expected to contribute 20% of assets, owned by them personally.

  • Funds can be rolled from a 529 college savings account to an ABLE account.

  • There is no limit on annual contributions that can be made to a 529 plan, although contributions over the annual gift tax limit by any one person may generate tax issues.

  • A person can be the beneficiary of more than one 529 account.

529 Account Weaknesses:

  • In order to withdraw them tax-free, funds from a 529 plan must be used to pay qualified educational expenses. This can include any course at an accredited institution that can participate in the US Department of Education’s financial aid program, but it will not include things like the pre-vocational and vocational programs, offered by adult disability-service providers.

  • 529 plans require the account owner to request withdrawals, so the young person with a disability must work through an intermediary.

  • Any distributions from a 529 plan to a beneficiary receiving Supplemental Security Income or Medicaid, must be used for educational expenses, or they will be treated as a gift and hence, unearned income to the student with a disability. Moreover, if it is distributed for educational purposes, but held in the student’s personal account for more than nine months, it is then also considered a countable resource.

So, to answer the question of whether you should fund an ABLE account or a 529 plan for your child with a disability, you need to first answer questions about her/his young-adult and adult life. For example:

· An ABLE account may be appropriate, if it seems likely that your child will qualify for Supplemental Security Income(SSI) and need Medicaid-waiver funded services but will also have at least some capacity to manage her/his own money.

  • An ABLE account may be appropriate if you expect that your child will be able to work and

    • Will not spend most of her/his earnings and instead accumulate a balance that would undermine SSI and Medicaid eligibility.

    • May only work part-time and for that reason or for reasons of maintaining Medicaid eligibility may not be able to contribute to her/his employer’s 401(k). Hence, an ABLE account may be appropriate.

  • An ABLE account may be appropriate, if you expect your child to need assistance paying for food and shelter in her/his adult life.

  • A 529 College savings plan may be appropriate, if it becomes clear that your child both has the capacity for and would benefit from one of the many post-secondary academic and vocational programs for youth with disabilities, and the programs you favor are located at eligible educational institutions. This is particularly true if:

    • You are not sure that your child will continue to meet the Social Security definition of disability for adults and/or…

    • Your child has siblings or other family members, who will also require college funding.

My kids make use of each of their wheeled, propulsive items for various different purposes. Similarly, in some cases, it may be appropriate to have both a 529 college savings plan and a 529A ABLE account to benefit your child with a disability and grow assets for her/him in a tax-advantaged environment.

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