Meet the 529 ABLE account: A new way to save for disabled beneficiaries

Clients with disabled children get a new vehicle

Feb 2, 2015 @ 2:36 pm

By Darla Mercado

Taxpayers caring for disabled children can look forward to a new savings vehicle that will help them cover certain expenses: The 529 ABLE account. But could it replace the tried-and-true special-needs trust?

This new savings account was brought into existence after President Barack Obama signed it into law on Dec. 19, 2014, along with the tax extenders package for that year. The legislation is called the Achieving a Better Life Experience Act, and it expands the tax code under Section 529 to create tax-advantaged accounts for disabled individuals.

As contributions go, individuals can contribute up to $14,000 — the current annual gift exclusion amount — in a given taxable year into one of these ABLE accounts.

Account holders can take distributions, provided they are for the beneficiary's qualified disability expenses. That amount will not be included in gross income. In order to be eligible for an ABLE account, the beneficiary must be someone who had a disability that occurred before he or she turned 26.

One of the biggest benefits of the ABLE account is that the money held there is exempt from the $2,000 limit on personal assets for individuals who wish to qualify for public benefits. Generally, a disabled person with more than that amount is ineligible for Medicaid and Supplemental Security Income benefits.

Though the accounts are now allowed, they're not here yet. “The government has authorized the creation of ABLE accounts, but you can't open one today,” said Tim Steffen, director of financial planning at Robert W. Baird & Co. “The individual states will have to come up with their plans and they'll have to market them to individuals in their states.” He predicted it would be at least a year before these 529 ABLE vehicles become a reality.

Nonetheless, it's worth doing a side-by-side comparison of the 529 ABLE and the special-needs trust, an irrevocable trust accountants have turned to in order to help parents provide for their disabled children — while preserving eligibility for public assistance.


Though the intent of 529 ABLE accounts is the same as special-needs trusts — allowing disabled beneficiaries to qualify for Medicaid and SSI income benefits — how they'll accomplish that will be different.

Let's start with the limits applying to contributions and the size of the account. Special needs trusts can hold an unlimited amount of assets, but only the first $100,000 in the ABLE account will not be subject to the $2,000 personal asset limit that determines eligibility for receipt of SSI benefits.

Further, special-needs trust assets can be used to cover nonmedical things Medicaid otherwise wouldn't cover. These are called “supplemental” expenses. “You're allowed to have assets for things like haircuts, grooming, personal items that Medicaid doesn't pay for,” said Theodore J. Sarenski, a CPA and personal financial specialist with Blue Ocean Strategic Capital. Meanwhile, there are limits on the types of expenses an ABLE account can cover: education, housing, health care, prevention and wellness, and funeral expenses.

Beneficiaries who die with money in the 529 ABLE account will have to repay the public benefits they had received after opening the account.

Perhaps the most glaring difference between the 529 ABLE account and the special-needs trust comes down to the tax and cost implications of each.


Don't forget that trusts are subject to steep taxes for income that isn't distributed. Money that's going out of a special-needs trust is taxable to the beneficiary receiving it. Properly structured, income generated within the special needs trust won't be taxed at the top rate of 39.6%.

Meanwhile, money coming out of a 529 ABLE account is tax free if it's going toward a qualified disability expense. With Mr. Obama backing away from taxing 529 accounts altogether, at least we can be reassured that beneficiaries of 529 ABLE accounts won't have even more to worry about.

“The benefit [of the 529 ABLE] is that you avoid taxation, especially now that the president has dropped the idea of taxing the 529,” Mr. Sarenski said. “In the near future, you won't have to worry about taxation on 529s. But it's a tax law, and as we know, tax laws can change.”


Tax experts envision two different kinds of consumers going for the special-needs trust and the 529 ABLE account.

“People who don't have the assets for a special-needs trust, middle-class taxpayers” might prefer the ABLE, said Mr. Steffen. Special-needs trusts require an attorney to draft the document, plus a trustee to manage the assets, so it'll make better sense for those clients who have that kind of money. Further, the ABLE account will likely have money going into it and coming out on a regular basis, while the special-needs trust is more of a vehicle for long-term assets.

Wealthier individuals, meanwhile, will find the tax-free benefits of the ABLE account to be even more beneficial. It's another way to provide for a disabled child's educational and housing needs while still locking in the benefits of Medicaid. Clients may even look into using a special-needs trust and a 529 ABLE account, the former for larger assets and supplemental expenses and the latter for near-term needs.

“These accounts solve different needs and different purposes,” Mr. Steffen said. “I don't see why they can't work together.”


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


Top questions surrounding future of DOL fiduciary rule

Reporter Greg Iacurci and managing editor Christina Nelson discuss the biggest uncertainties springing from the Fifth Circuit Court of Appeals' decision to vacate the regulation.

Latest news & opinion

Stocks plunge, advisers tell clients to hang tight

Though planners encourage calm, some are preparing investors for a correction.

Lightyear Capital's Donald Marron said to be in the hunt for Cetera Financial Group

The veteran brokerage executive, who bought Advisor Group in 2016, owned Cetera once before.

What to watch for next with the DOL fiduciary rule

Much hinges on whether the Labor Department appeals the 5th Circuit decision by April 30.

Social Security benefits losing buying power

Low inflation combined with rising Medicare costs threaten the adequacy of seniors' income.

Finra looks to streamline broker-dealer exams

CEO Robert Cook says three examination teams may be consolidated.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print