CD6,
We appreciate your question. Until a few years ago, the only solution would have been to either change the beneficiary of the 529 to an eligible family member; or use the money for non-college purposes taking a tax hit and IRS 10% penalty. However, a new choice was introduced in 2014 called the Achieving a Better Life Experience (ABLE) Account.
The ABLE account provides a tax deferred benefit, and the ability to save money in excess of government limits without risk of forfeiture of government assistance. As you know, the cost of raising a child with a disability can be very high. In a 2014 study, Autismspeaks.org reported that the average lifetime cost for a person affected with autism can range from $1.4M to $2.3M. When a special needs child “ages out” of public education, the need for daytime care may continue for many families. These costs can greatly impact your family finances.
ABLE account is similar to a 529 college savings plan, but can be used for qualified disability expenses of the special needs individual for things like education, housing, employment training and support, and health care. The good news is that you can rollover funds from your child's 529 college savings plan into an ABLE account and align the fund with more applicable qualified disability expenses if the child was diagnosed with the disability after the 529 college savings account had been created (note additional limitations in the 4th bullet below). Here are a few more things to consider.
- Individuals must be diagnosed with a significant disability before turning 26 years old to qualify.
- Individuals must be receiving benefits under Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), or be able to obtain a disability certification from a doctor that meet's SSA's definition of disability.
- The disabled individual is the owner and beneficiary of the money. The idea is if the beneficiary is of legal age and can manage the account on their own, they can be in control of the ABLE account. However, if they are still legally a minor, or are not capable of handling the responsibility; the parent or legal guardian can act as the administrator.
- The amount of contributions/rollovers are limited per year to the annual gift tax exemption amount which is currently $15,000. Also, any funds you contribute to the account are considered an irrevocable gift.
- The balance of the ABLE account at death of the account owner (the disabled individual) may likely go to the state to reimburse Medicare related expenses.
- The ABLE account beneficiary may become ineligible for government benefits if a balance of $100,000 is exceeded.
Consider weighing the choice of the ABLE account with other competing family goals. Alternatively, you have a choice to change the 529 beneficiary to another family member, or even yourself. Also, ask yourself how funds placed into this account might hinder other family goals, such as paying down debt, and saving for your own retirement?
USAA does not currently offer ABLE accounts. There are several states that do offer ABLE accounts. If your state does not offer a choice, consider there are other states offering ABLE accounts that do not have a state residency requirement to open an account. Please seek a qualified professional for legal and tax advice when planning for those with disabilities.
