Between doctor-visit copays, medical equipment, education, therapy and other necessary expenses, the cost of raising a special-needs child can top the $2 million mark over the course of a lifetime. It’s hard for people with disabilities and their families to save without running afoul of limits on the funds they can accumulate, and still qualify for some government benefits. To remain eligible for Medicaid health coverage or Supplemental Security Income, which assists people who are disabled, a disabled person generally can’t have more than $2,000 in savings or other assets.
At the end of 2014, the ABLE Act was passed to give families a new way to save for special-needs family members. The Act created a new account, 529A, which allows for tax-free growth for a special-needs beneficiary.
What is a 529A account?
These accounts are administered by the states, similar to 529 education-savings accounts. The funds must be used for qualified disability expenses. The annual contribution limit is $14,000 per individual, and total contribution limits vary by state. However, only the first $100,000 saved in the account is exempted from the SSI $2,000 limit, and beneficiaries with account values greater than $100,000 will not receive any SSI benefits (but will still receive Medicaid).
Who is eligible?
Families can establish a 529A account for an individual who meets the Social Security Administration’s definition of disabled. That definition requires that a person have a condition that will make him or her unable to participate in “substantial gainful employment.” The condition must be expected to last for at least 12 months or result in the person’s death. The beneficiary must have been diagnosed with a qualifying disability before age 26.
What is considered a qualified disability expense?
Funds in a 529A account must be used toward qualified expenses to realize the full potential of the tax benefits. Yet unlike a college fund, the money in a 529A plan will be spent over the course of the person’s lifetime on purchases related to living with a disability. Qualified expenses include education, housing, employment training and support, health care and financial management.
529A accounts versus 529 education-savings accounts
There are a few key differences between saving for disability-related expenses and saving for college. The first is that with a 529A account, you must open your own state’s plan, or the plan your state has a contract with. With a 529 college savings account, you can invest in almost any state’s plan. Next, when a parent contributes to a 529A account, it is considered an irrevocable transfer, meaning it cannot be taken back. This differs from a college savings plan, where the parent can use the money for their own purpose but will incur a 10 percent penalty on the earnings.
Factors to consider
Having a 529A does not disqualify an individual from receiving federal and state aid for the disabled, such as SSI or Medicaid, so long as the amount held in the 529A does not exceed $100,000. Should the balance exceed that amount, benefits would be suspended. They could resume once the balance falls below $100,000 again.
Rhode Island’s 529A
The R.I. Plan offers six investment options ranging from “conservative” (10 percent stocks) to “aggressive” (90 percent stocks). The annualized investment costs on assets per investment option range from 0.34 percent to 0.38 percent, depending on which investment option(s) you select. The investments can be changed twice-yearly based on changing investment objectives or to rebalance the portfolio. •
Matthew Neyland is the director of investments for SK Wealth Management and an adjunct professor at Johnson & Wales University.
