Investors ABLE to save for kids’ needs
By Lisa Lewitzke
My husband and I contribute monthly to each of our three children’s 529 college savings accounts. Saving for our children’s future is important.
Many investors contribute to college funds for their children and grandchildren. The 529 plan provides tax advantages, including tax-deferred earnings and tax-free withdrawals for qualified expenses, which boost investments in a child’s future. However, saving in a typical 529 plan may not be in a family’s best interest if a child has special needs.
Our son Wyatt had a stroke before he was born. Because of that and resulting complications, we are less certain of what his future holds. We dream Wyatt will go to college, but he might not. If we continue to put all of his assets in a typical 529 plan and he doesn’t use the funds for school, we would need to either give the funds to his siblings – leaving Wyatt with nothing – or take the funds out and pay a penalty, defeating the point of tax-deferred savings.
ABLE accounts are a new tax-advantaged savings plan for children with disabilities. For more information, click here for the ABLE National Resource Center.
Compare the available plans to find out which might be best for you. Accounts can be opened online, and representatives are available for assistance.
Click the state below to connect to its ABLE program.
The other drawback with continuing to save in a typical 529 plan for Wyatt is that it can count against him if he ever needs to apply for public assistance.
Saving for a child with special needs is anything but typical. Learning that Congress passed the ABLE Act (Achieving a Better Life Experience) in 2014 made me feel like our family and so many others have more options.
The ABLE account, also known as a 529A account, is modeled after the 529 college plan. Like the typical 529 plan, the ABLE account is easy to open and contribute to, the funds grow tax-deferred and qualified expenses are tax-free. Unlike the typical 529 accounts, use of the ABLE assets is not restricted to education. They also could be used for the beneficiary’s health or personal support services and other related expenses, thus allowing much more freedom on how the funds are spent. Please click here for more information on allowable expenses.
Also, money invested through ABLE accounts does not count against eligibility for government assistance.
Having a differently abled child can come with many extra expenses. Many families depend on public benefits like Supplemental Security Income or Medicaid that require an individual to have less than $2,000 in cash or any kind of savings in their name – including the typical 529 college plan. The ABLE Act recognizes those extra expenses and allows families to provide for their children’s future without affecting their eligibility for government services that may be needed.
Individuals qualify for ABLE accounts if they experienced a disability prior to age 26 and have met the requirements for government assistance through Social Security’s Supplemental Security Income (SSI) program.
If they are not eligible for SSI, individuals still may be eligible to open an ABLE account if they meet Social Security’s list of impairments. Please click here for more information.
Like typical 529 plans, ABLE accounts are offered through state-sponsored programs, most of which are open to residents of any state. Enrollment opened in 2016 with plans in four states – Florida, Nebraska, Ohio and Tennessee. The ABLE account programs in Michigan, Nebraska, Ohio and Tennessee are open to out-of-state residents.
Each ABLE plan requires a minimal initial contribution and provides a variety of investment options.
So far, Wisconsin has opted not to have its own ABLE program but allows residents to enroll in ABLE accounts elsewhere and offers a tax deduction for qualified contributions.
The annual contribution limit to an ABLE account from all contributors combined is the maximum annual gift-tax exclusion, currently $14,000. There is a limit of one ABLE account per beneficiary.
Each ABLE program has different rules for an account maximum, although balances exceeding $100,000 would trigger a suspension of SSI payments until they’re below $100,000 again.
Some families set up a special needs trust, which can be an effective – and often complex and costly – way to leave assets to a child with a disability without risking the child’s SSI or Medicaid benefits. Trusts and ABLE accounts can work together to protect a child.
If we had unlimited assets, we would be saving in all of these buckets. But right now my husband and I still need to save for our own retirement while providing for our children’s future as well. We are planning to stop monthly contributions to Wyatt’s typical 529 and open an ABLE account for him. The ABLE account gives us peace of mind that the money we save there will help him and not be counted against him.
To view a video about Lisa’s efforts to raise awareness of childhood strokes, please click here.
Anything is possible for Wyatt, but it’s important to me to know he will be taken care of – on whatever path his journey takes him.
Lisa Lewitzke is a registered representative and investment associate at Landaas & Company.
(initially posted Oct. 14, 2016)