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Retirement Perspectives

The 529 ABLE Account is a new way for a caretaker to create a tax-advantaged investment account for an individual with special needs or disabilities.

Caring for someone with special needs can come with joys but also challenges, and may require special financial planning. Roughly 56.7 million people (19% of the U.S. population) reported a disability in 2010—and more than half of them said that the disability was severe, according to the U.S. Census Bureau.

Financial planning for an individual with special needs is complex. Caretakers may have limited financial resources and rely on government benefits. Therefore, caretakers need a financial professional that can help them navigate the myriad rules, along with federal and state laws and regulations, to build a savings and investment strategy for a special needs beneficiary.

To help ease the savings challenge for caretakers and special needs individuals, Congress passed the Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act of 2014, adding Section 529A, which creates a new type of tax-advantaged savings account  for certain disabled individuals and allows them to retain their eligibility for federal public benefits.

How ABLE Accounts Work
The framework for ABLE accounts is somewhat based upon 529 College Savings Plans.

ABLE Accounts are funded with aftertax dollars (although some state plans offer a state tax deduction for in-state residents), assets grow tax-deferred, and distributions (including earnings) for “qualified disability expenses” (QDEs) are tax free.  

QDEs, for example, are expenses for items or services needed to maintain or improve your health, independence, or quality of life. Such expenses include, but are not limited to, housing, transportation, legal fees, employment training, health and wellness, financial management and funeral services. Non-qualified distributions are subject to ordinary income tax and 10% early withdrawal penalty.

Eligibility for ABLE Accounts
In order establish an ABLE account, a beneficiary must be disabled, and such disability must have occurred before the individual’s 26th birthday. If a beneficiary meets this age (26) requirement and is also receiving SSI or Social Security Disability Income (SSDI) payments, he/she automatically qualifies to establish an ABLE account.

For those individuals that have satisfied the age requirement but do not qualify for SSI/SSDI eligibility remains possible. Here you need to meet Social Security’s definition of disability and receive a letter of certification from a physician.

 

You can be older than age 26 to establish/fund an ABLE account. However, the disability must have begun (onset) before an individual’s 26th birthday.

 

ABLE accounts can be used in conjunction with supplemental benefits—and not replace benefits already provided through Medicaid or Social Security’s supplemental security income (SSI) or private medical insurance. Notably, eligibility for public benefits (SSI and Medicaid) require satisfying a “means” or resource test that generally limits eligibility to individuals that have less than $2,000 in savings and retirement funds.

A primary benefit of ABLE accounts is that unlike most other assets, the value of an ABLE account is not considered an asset when determining eligibility for Medicaid benefits.

However, for SSI eligibility, only the first $100,000 in ABLE accounts will be disregarded. SSI payments will be suspended (not terminated) when an ABLE account owner’s balance exceeds $100,000.

 

Not all states have established an ABLE program. However, a beneficiary or their caretaker can still establish an ABLE account if the designated beneficiary resides in a state that has not yet established a program. The qualifying individual can enroll in a state’s ABLE plan if it accepts out-of-state residents. As a general rule, a person may only have one ABLE account.

 

Contributions
The annual contribution limit (2019) for ABLE accounts is generally limited to $15,000 (subject to inflation). Eligible individuals are limited to one ABLE account, but contributions can be made by anyone, including the person with a disability (referred to as “designated beneficiary,” parents, families, or others. Notably, if a designated beneficiary is the one who makes the contributions, he/she will now be able to claim the Saver’s Credit as well, which is normally only available for contributions to retirement accounts.)

Even if the annual contribution limit to the ABLE account is maxed, a designated beneficiary may be able to make an additional contribution, under a separate new provision. New rules stipulate that the beneficiary may contribute to their 529A account, above the normal contribution limit ($15,000), if they have earned income from employment. Maximum amount of employment income that can be contributed is $12,490 in 2019 (the rule is less than 100% of their compensation, or the Federal poverty line threshold for a one-person household). In addition, the designated beneficiary must not also be contributing to a workplace retirement plan (401(k), 403(b), 457(b) plan).

The Tax Cut and Jobs Act of 2017 added another new provision. New rules permit 529 assets to be rolled over to an ABLE account (without taxes and/or penalties), as long as the 529A beneficiary is the same person (or a member of the same family) as the original 529 account. Such rolled over amounts count toward overall limitation on amounts that can be contributed to an ABLE account within a tax year—any amounts rolled over in excess is includible in gross income of the distribution.

Rollovers from 529 plans to ABLE accounts will still be restricted to (and count toward) the annual contribution limit for ABLE accounts, which is tied to the gift exclusion ($15,000 in 2019).

Death and Medicaid Payments
When a special needs beneficiary dies, assets remaining in an ABLE account can be used to reimburse a state for any Medicaid payments received while the beneficiary was alive. This is commonly known as the “Medicaid payback” provision. Some states have passed state laws that prohibit this Medicaid payback provision. We encourage you to ask your attorney and/or CPA to see if your state has passed this law.

Upon death of the eligible individual, money remaining in the ABLE account would go to the deceased’s estate or designated beneficiary and be subject to income tax. If the beneficiary did not receive Medicaid-funded services, any assets remaining in the account pass to the estate of the account owner and are distributed under the provisions in the individual’s written will.

529 ABLE accounts are not available at Lord Abbett. Please contact your financial advisor, accountant, or tax professional to find out which account may be suitable for your savings needs.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY OF TERMS

An ABLE Account, also called a 529A account, allows individuals with disabilities and their families a tax-advantaged way to save money for disability-related expenses of the account’s designated beneficiary. Contributions to an ABLE account may be made by any person (the account beneficiary, family and friends) using post-taxed dollars. The ABLE account was created with the passage of the Stephen Beck Jr., Achieving a Better Life Experience Act of 2014, or the ABLE Act.

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

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