ABLE Accounts v. 529 College Savings Accounts

ABLE Accounts can provide tremendous benefits for young people with disabilitiesexcerpted from ENABLE Special Needs Planning Newsletter

What is a 529 College Savings Plan?

A 529 is a college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs.

What Is An ABLE Account?

Since 2014, ABLE accounts have allowed families to save more than $2,000 for their child with special needs without losing access to key government benefits. In fact, you can save up to about $300,000 while maintaining your Medicaid services. $100,000 is the max you can accumulate without impacting your SSI.

Similarities Between The Two Plans:

  • They allow you to shelter income.
  • They provide key tax benefits.
  • Contributions to the account can be made by any person (the account beneficiary, family and friends).
  • Contributions must be made using post-taxed dollars and are not tax deductible.
  • They offer different investment options.
  • Funds can only be used for qualified expenses.

Qualified Expenses: 529 Plans

Qualified expenses include tuition and fees, books and materials, room and board (for students enrolled at least half-time), computers and related equipment, internet access and special needs equipment for students attending a college, university or other eligible post-secondary educational institutions.

Transportation costs, health insurance and student loan repayments are not considered qualified expenses.

The Tax Cuts and Jobs Act of 2017 also allows tax-free distributions of up to $10,000 per year, per beneficiary to pay for K-12 tuition expenses at private, public and religious schools.

The earnings portion of a non-qualified withdrawal may be subject to federal and state income tax, as well as a 10 percent tax penalty. Since your contributions were made with after-tax money, they will never be taxed or penalized.

Qualified Expenses: ABLE Accounts 

A “qualified disability expense” means any expense related to the designated beneficiary as a result of living a life with disabilities.

These may include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other expenses which help improve health, independence, and/or quality of life.

Key Differences Between The Two Plans:

  • ABLE accounts are only for people with disabilities and their families. In fact, the ABLE Act limits eligibility to individuals with significant disabilities that began before age 26.
  • With traditional 529s, the beneficiary is often different from the account owner. With ABLE accounts, the beneficiary of the account is the account owner.
  • 529s can only be used to cover education-related expenses. ABLE accounts can be used to cover many additional expenses related to having a disability.
  • Unlike 529 plans for education savings, ABLE accounts are direct-sold only. An individual/family has to open and mange its own account.
  •  ABLE accounts have a Medicaid payback requirement.