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Updated on Wednesday, January 16, 2019
Life can be very expensive, especially if you or a loved one is paying for disability-related expenses. The sheer amount of expenses can take a toll on any budget. Luckily, the 529A Savings Plan can help ease the burden.
What is a 529A plan?
Similar to a 529 college savings plan, a 529A plan allows you to save for a specific purpose. Instead of strictly using the money for education-related expenses — as would be required with a 529 college savings plan — you can use the money for disability-related expenses. Disability-related expenses include employment training, health care, financial management services, transportation, housing, education, and any other expense that improves the beneficiary’s independence or quality of life.
The “A” in 529A stands for ABLE (Achieving a Better Life Experience). The entire goal of this legislation is to provide a way for Americans with disabilities to save up to $15,000 per year per individual.
Each state has its own aggregate limit, which means you can’t contribute any additional funds into the account past that limit. However, if the beneficiary withdraws money from the account, you can continue adding money into the account up to the limit. For example, if a 529A account has an aggregate limit of $100,000, then you will not be allowed to contribute any more if it has reached that $100,000 threshold.
Once the funds are safely within the 529A account, you will have a variety of investment options available, which will vary by state. Many states offer ways to invest your money in mutual funds and money market funds within the 529A account. You may even have the ability to store it in a checking or savings account through your 529A.
You should also be aware that the funds in a 529 ABLE account may preclude you from collecting federal or state disability benefits. The funds are considered resources of the individual, which could affect their eligibility for certain programs like Supplemental Security Income.
Depending on the rules of your state and your unique goals, you may wish to consult with a financial planner on the best way to invest the money you are able to save in your 529 ABLE account.
Who is eligible for a 529A plan?
The beneficiary of a 529 ABLE account can be an individual of any age; however, the individual must have acquired a qualifying disability before the age of 26. If you are attempting to open a 529 ABLE account after the beneficiary’s 26th birthday, then you will need a signed letter from a doctor indicating that the disability set in before they turned 26.
The parent or guardian of the beneficiary or the designated power of attorney for the individual can open a 529 ABLE account for the beneficiary.
Tax benefits of a 529A plan
529A accounts offer significant tax benefits. Although the contributions made to the 529A account are after taxes, the earnings made within the account are not subject to federal taxes. In other words, the funds placed in this account will grow tax-deferred.
What about taxes on withdrawals? As long as a withdrawal is used to pay for a disability-related expense, the withdrawal will not be subject to federal taxes. Many states also refrain from taxing 529A withdrawals.
Finally, some states will even provide state tax deductions for state residents placing funds into a 529 account. “Individuals need to consider their state’s tax incentives in addition to federal tax benefits,” said Ksenia Yudina, a CFA with U-Nest. “In case the state doesn’t provide special tax deductions to its residents, individuals need to look at various other factors to maximize the benefits of using the accounts.”
If you are having difficulty maximizing your tax benefits, you should discuss your options with a professional in your state.
Are there 529A fees?
As with many investments, there are fees involved with 529A accounts. Depending on the specific state plan, the following are common fees you might expect with an ABLE account:
- Disbursement fees. Only two state plans — Oregon and Texas — charge a disbursement fee. Fees may be based on plan type, such as opting for paper-statements or plans with a prepaid card, (Oregon), or for withdrawals by ACH or check (Texas).
- Debit card fees. Some plans have the option of providing account holders with a debit card or purchasing card. Although some offer this service for free, others charge a small fee ranging from $1.25 to $2 per month, with the option of waiving the fee if you meet certain conditions.
- Annual fees. Annual fees can range from $30 to $60 and may be broken up into monthly or quarterly payments. Some plans offer a discount on annual fees for things like opting to receive e-statements over paper statements.
- Investment fees. These fees are dependent on the individual’s investment choices and range from 0.19% to 0.94% Louisiana’s ABLE plan is the only one that doesn’t charge investment fees.
529A Saver’s Credit
The Saver’s Credit is a federal tax credit that allows low and middle-income individuals to claim a return when they make contributions to their retirement accounts. In this case, beneficiaries of a 529 ABLE account can claim the Saver’s Credit on contributions made to the account. The amount of the credit varies based on your adjusted gross income, and can be 50%, 20% or 10% of your annual contributions made that year.
Take a look at the table below to understand how the Saver’s Credit will impact your contributions. These numbers are the adjusted annual income ranges that you would need to qualify for the Saver’s Credit.
|2019 Saver's Credit|
|Credit Rate||Head of household||Married filing jointly||Single, married and filing separately or qualifying widow(er)|
|50% of contribution||Less than $28,875||Less than $38,500||Less than $19,250|
|20% of contribution||$28,876 to $31,125||$38,501 to $41,500||$19,251 to $20,750|
|10% of contribution||$31,126 to $48,000||$41,501 to $64,000||$20,751 to $32,000|
|0% of contribution||More than $48,000||More than $64,000||More than $32,000|
States with 529A accounts
Not all states offer a 529 ABLE plan. The following states don’t offer a 529A plan: Connecticut, Hawaii, Idaho, Main, Utah, and Wisconsin. However, you may still be able to open a 529 ABLE account. Some states offer 529A accounts that accept non-residents into their state’s program.
One of the best resources to find the best option for you is the ABLE National Resource Center. It is a great place to find preliminary information about 529A account options. The website lets you compare different plans to help you narrow your options. Once you have selected a few plans, you can investigate further by visiting the program’s specific website, which is linked to on each state plan description on the website.
The rules of 529A plans will vary by state; however, there are many tax breaks available for those that are eligible. If you aren’t sure exactly how to maximize your tax benefits, speak with an advisor in your state to find out more about your options.