Changes to the ABLE Account Rules You Need to Know
Could you describe the changes in the ABLE account rules that were brought about by the new federal tax legislation? As most of you know, the ABLE Act was passed back at the end of 2014 and paved the way for individuals diagnosed with a disability before the age of 26 to save money without the danger of forfeiting eligibility for government benefits such as Supplemental Security Income and Medicaid.
Two concerns that disability organizations, families, individuals, and professionals discovered was:
1.The annual funding limit ($15,000 in 2018)
2. The lack of an ability to transfer existing 529 college savings plans to an ABLE account without penalty
Disability community advocates, almost immediately, began lobbying for these items to be addressed in some form or fashion. The community realized that individuals with a disability who did work did not have the flexibility needed to save more money especially if other family members were also contributing to their ABLE account. The community also realized that many families had begun 529 college savings accounts before their children were diagnosed or because their children were academically successful, however, when the children were unable to attend college, the 529 money was held hostage by taxes and penalties.
The tax legislation that passed earlier this year addressed these two concerns. The new legislation now allows individuals with disabilities, who are working, to save an additional $12,060 (federal poverty level) per year in an ABLE account above the $15,000 for a total of $27,060. This is a great victory, but it comes with possible landmines. It will be the responsibility of the ABLE account holders to do an accounting of the contributions to an ABLE Account, and Social Security and Medicaid will view contributions from earned income differently than other additions. Mistakes made could be very costly because government benefits are at risk.
Disability advocates are concerned with how the law was written and how mismanagement of contributions could cause individuals to lose life-sustaining government benefits. Chris Rodriguez, director of public policy at the National Disability Institute. “To the best of my knowledge, ABLE programs are not currently implementing this provision of the tax law due to this uncertainty and need for clarification.” When I see this concern, it continues to build my resolve that everyone with a disability needs a plan for the future, and they need people and professionals involved in that plan, so they have the proper supports so mistakes can be avoided.
The second concern is more straightforward. With the passage of the new tax laws, families who started a 529 college plan for their children with special needs, now have the option to roll over those assets into an ABLE account without penalty! This is a great victory for many families because, before this legislation, families considered a 529 a “lost” account unless they wanted to withdraw the money and accept taxes and penalties which for some could ravage the value of the account by nearly 40%!
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If you have a 529 account and want to rollover the money to an ABLE account, please call the state ABLE account you would like to use to ask if they accept those rollovers at this time. As with any new legislation, it takes time for the laws to be implemented so that they are usable. Again, please think through this decision because if you have other children who may attend college, you can change the beneficiary on the 529 to that child to help pay their tuition. This may be a better choice depending on your overall financial situation, and because the ABLE Act still includes payback to Medicaid at the end of your child’s life.
As with any changes in the laws, you should consult your professional special needs planner to ensure you navigate them correctly and that your intent will become the reality!
For more information on how to prepare for the future, be sure to contact a financial advisor who specializes in serving families with special needs. A Special Needs Plan is driven by their purpose of Leading Families to Independence through an on-going multi-generational plan. A Special Needs Plan is passionate about families moving confidently forward.
Ryan F. Platt, MBA, ChFC, ChSNC, is a registered representative of and offers securities, investment advisory, and financial planning through MML Investors Services, LLC, member SIPC. A Special Needs Plan is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. This article is not a recommendation or endorsement of any products.
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This is article was featured in Issue 74 – Every Voice Matters