Managing the 529 Plan When a Child Cannot Continue Education
Question: “We have been saving for our son, who has Autism, in a 529 college plan since he was born. He is now 16 years old, and it appears as though he will not have the ability to attend college and use that money. He is our youngest child, and all of our other children have completed their education. What do we do with this money?
I am so glad you asked this question, because the answer to this question continues to evolve as new legislation is passed that impacts 529 college savings plans.
Before 2017, you were stuck with the account, and were facing penalties and taxes as you unraveled the money from being entangled within the rules of 529 plans. The tax law that was passed at the end of 2017 provided another option.
Due to the fact ABLE accounts were passed into law in 2014 and are now available for individuals with a diagnosis, the 2017 tax law allowed for the transfer of assets from a 529 college savings plan into an ABLE account (ABLE accounts are only for individuals with a disability) without penalties or taxes! You want to be careful with this transfer as it may take time.
When you look to transfer your son’s 529 college plan into an ABLE account that you set up for him, you will still need to abide by the annual contribution rules of an ABLE account ($15,000 maximum contribution per calendar year).
For example, if you have $45,000 in your son’s 529 college plan, you will need to have a 3 year plan (expecting no change in the value of the 529 plan) to move the money from the 529 to the ABLE account, due to the fact you will only be allowed to move $15,000 per year into the ABLE account.
When your son turns 18 years old and qualifies for Supplemental Security Income (SSI), you will want to stay abreast of the value of his ABLE account because if it grows to above $100,000, his SSI benefit will be suspended.
Based upon The Secure Act that was passed into law at the end of 2019, you now have another option for the 529 plan. The Secure Act deals mostly with Retirement Plan rules; however, 529 plan distribution rules were impacted. The Secure Act now allows the balances in 529 college savings plan to be used to pay off college loans.
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It is very common, based upon a person’s chosen profession, that some parents of children will still have college or graduate school student loans that are not paid. It also is common that other children may be saddled with college debt.
Wiping out this college debt is now an option with 529 plans. Please remember you must first change the beneficiary of the 529 to the person whose loans you expect to pay off, or pay down, with the money from the 529 college savings before you ask for distribution checks to pay off those student loans.
529 College Savings Plan are no longer as rigid as they once were. Hopefully, one of these options may fit for your family as you decided on the best use of the money in your son’s 529 college savings plan.
This article was featured in Issue 101 – Balancing The Autism Journey