Age of disability for ABLE accounts will increase from 26 to 46.
Unused 529 accounts can be rolled into a Roth IRA.
Q. I have two children. One is an adult child with an autism spectrum disorder (ASD), and another is a lot younger and is neurotypical. We are considering setting them both up with 529 accounts—one to save for college and the other, a 529A or ABLE account, to help our child with ASD live a better life. I heard that with the SECURE 2.0 Act, the one with the loan forgiveness provisions, there are also new rules for 529s and ABLE accounts. Can you tell me more about this and when they go into effect? Thanks so much for your help!
A. The SECURE 2.0 Act made many major reforms to the law. Two of them improve options with regard to 529 account and ABLE accounts. The new law expands eligibility so that more people with disabilities can open ABLE accounts and adds provisions allowing much more flexibility for owners of traditional 529 used to fund higher education.
In 2014, federal legislation paved the way for states to offer ABLE accounts — short for Achieving a Better Life Experience Act. ABLE accounts, also known as 529A accounts, are modeled after 529 college savings plans. As of April 2023, ABLE accounts are available everywhere in the country except Idaho, North Dakota, South Dakota, and Wisconsin, but residents of these states can establish ABLE accounts in any state that allows out-of-state residents to join, such as the nation’s largest college savings plan, ABLEnow, a national ABLE savings program offered by Virginia and administered by Virginia529, an independent Virginia state agency.
The ABLE Act created savings accounts that allow Americans with disabilities to save money without affecting their need-based programs, such as Medicaid, Supplemental Security Income, and the Supplemental Nutrition Assistance Program. With these programs, people are typically limited to $2,000 in savings and other liquid assets in order to qualify. However, any money saved in an ABLE account does not count toward that number.
There is no limit on how much you can contribute to an ABLE account. However, you can only have up to $100,000 in your ABLE account and keep getting Supplemental Security Income (SSI) benefits as long as you meet all other SSI rules. If you go over $100,000, SSI benefits will stop, but they will start up again if your ABLE account drops back below $100,000, and you won’t have to reapply.
Contributions to an ABLE account are not tax-deductible at the federal level (although some states allow deductions against state income taxes), but investment gains inside an ABLE account grow on a tax-deferred basis, and withdrawals used for qualified disability expenses (such as medical treatment, education, tutoring, and job training) are tax-free, thus making ABLE accounts extremely beneficial from a tax perspective, allowing account owners to completely avoid paying income tax on growth, similar to Roth IRA accounts.
Expanding the ABLE Act Could Help Millions of Americans with Disabilities
In December 2022, the omnibus spending bill passed by Congress and signed by President Joe Biden included the ABLE Age Adjustment Act. The new law raises the age threshold of eligibility to open an ABLE savings account, helping more Americans with disabilities save for crucial disability-related expenses. Here are some of the important changes:
- Before the age adjustment, only individuals with an onset of disability before the age of 26 qualified to open an ABLE account.
- In January 2026, the age of eligibility will expand to include those who became disabled before age 46.
- People with disabilities and family members will be able to deposit $17,000 in an ABLE account for 2023, a $1,000 increase from the previous year’s contribution limit. Note that the amount of money you can contribute to an ABLE account each year is the same as the annual exclusion amount for gift taxes. Click here for more information on this exclusion, as it is very important to understand that this exclusion is not a “limit,” nor does this exclusion allow gifting for Medicaid purposes.
- If the designated beneficiary of the account has a job and their employer isn’t contributing to a retirement plan, they will also be able to contribute an additional $13,590 per year to their ABLE account from their earnings.
- Those who do not receive SSI or SSDI but meet the age of onset disability rule could still be eligible for an ABLE Account. As long as they meet Social Security’s definition regarding functional limitations and receive a letter of disability from one of the following, they may be eligible: licensed physician, doctor of osteopathy, doctor of dental surgery or medicine, or in some cases, a doctor of podiatric medicine, optometry, or a chiropractor.
- As long as an individual experienced the onset of a disability before the required age, they can apply, even if they are older at the time of application.
The new eligibility age threshold will not go into effect until January 2026, but according to The New York Times, an additional 6 million people will qualify for ABLE accounts when the rule goes into effect!
How the SECURE 2.0 Act Helps Those with 529 Accounts
Similar to ABLE accounts, 529 accounts are also state-sponsored, tax-advantaged plans. Anyone, including the account creator, can be the beneficiary of the account, as long as the money is spent on higher education. 529 accounts offer a variety of investment options. You can use a 529 plan to pay for college, K-12 tuition, apprenticeship programs, and even student loan repayments. If using a 529 plan to save for college, your savings will have a minimal impact on financial aid eligibility. If you are a grandparent creating a 529 account for your grandchild, the account will have no effect on financial aid; please see our recent article on this topic.
Under current law, there is no way to get money out of a 529 account without a 10 percent penalty on the account’s earning if the beneficiaries’ higher education expenses end up being less than the amount saved. This can deter the use of 529 accounts due to the risk of the beneficiary getting an unexpected scholarship or not attending college at all, thereby subjecting most of the account to the penalty.
The SECURE 2.0 Act addresses this problem, as follows:
- It permits 529 account holders to roll unused 529 funds into a Roth IRA, since both Roth IRAs and 529s are post-tax accounts that grow tax-free.
- Americans saving in a 529 college savings plan will soon be able to transfer unused 529 plan funds into a Roth IRA in the same beneficiary’s name, without incurring income taxes or tax penalties on the rollover.
- To qualify for the transfer, the 529 plan must have been open for at least 15 years. Beneficiaries will be able to roll over a maximum of $35,000 over the course of their lifetime.
- Transfers will also count toward annual Roth IRA contribution limits. For 2023, the Roth IRA contribution limit is $6,500 or $7,500 for those ages 50 and over. However, contributions to a 529 plan made in the last five years aren’t eligible for tax-free transfers to a Roth IRA.
“Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education,” the official summary of the Secure 2.0 Act said. “They should be able to retain their savings and begin their retirement account on a positive note.”
Again, this provision takes effect in 2024.
For more information about 529 Accounts, please visit https://www.virginia529.com/ in Virginia, https://maryland529.com/ in Maryland, and https://www.dccollegesavings.com/ in DC.
For more information about ABLE accounts, please visit the ABLE National Resource Center at www.ablenrc.org. For the ABLE Act in Virginia, visit https://www.ablenow.com/, in Maryland, visit https://www.marylandable.org/, in DC visit https://savewithable.com/dc/home.html.
Have an ABLE Account? Why a Third-Party Special Needs Trust May Still Be Needed
Even if you already have an ABLE account in place for a family member, a Third-Party Special Needs Trust is often still needed. Why? A Third-Party Special Needs Trust is recommended to protect a disabled individual’s financial future. This type of trust preserves legal eligibility for federal and state benefits by keeping assets out of the disabled person’s name while still allowing those assets to be used to benefit the person with special needs.
Unlike an ABLE account, which requires that any remaining funds be paid back to Medicaid upon the death of the account owner, assets going into a Third-Party Special Needs Trust are contributed by a parent or other family member. Any assets remaining in a properly established Third-Party Special Needs Trust are not recoverable by Medicaid at the time of the beneficiary’s death. This allows the creator of the trust and other family members to provide for a secondary beneficiary. Therefore, an ABLE account should NOT be used as a substitute for a Third-Party Special Needs Trust, but rather only a limited substitute for a First-Party Special Needs Trust. Read more here.
Plan Ahead for Yourself and Your Loved Ones
When it comes to special needs planning and financial planning, the Farr Law Firm can guide you through this process. In addition, by having your estate planning and incapacity planning documents in place, you and your loved ones will have the peace of mind that your family’s needs will be adequately and properly addressed.
When you’re ready to start or update your own planning, please contact us to schedule your appointment for an initial consultation:
Northern Virginia Special Needs Planning: 703-691-1888
Fredericksburg, VA Special Needs Planning: 540-479-1435
Rockville, MD Special Needs Planning: 301-519-8041
Annapolis, MD Special Needs Planning: 410-216-0703
Washington, DC Special Needs Planning: 202-587-2797
About Evan H Farr, CELA, CAP
