The new tax law enacted on December 22, 2017 contained important updates in regard to both 529 and ABLE accounts. These accounts are both designed to promote savings that grow tax-free, so long as they are used for a specified purpose (529 accounts must be used for education costs and ABLE accounts must be used for qualified disability expenses on behalf of a person who was disabled before the age of 26).
The new law broadened the usage of these accounts in several important ways that impact families with children who have special needs. First, the law expanded the use of 529 accounts (which were previously only for college and higher educational expenses) so that now up to $10,000 per year may be used for elementary or high school tuition and costs associated with attending school. This can be for a public, private, or religious school. In addition to tuition, the $10,000 may be used for books and instructional materials, curriculum materials, online educational materials, tutoring, and educational therapies for students with disabilities in connection with homeschooling. This provides more options for families who have established a 529 account for a child with special needs.
Additionally the law also allowed up to $15,000 per year of a 529 account to be directly rolled into an ABLE account. The direct transfer preserves the tax free growth inside the account. Previously in order to transfer monies from a 529 account to an ABLE account, the monies would have to be withdrawn from the 529 account, and since the withdrawal would not be for proper educational costs, then income taxes would be paid on the growth portion of the withdrawal, and a 10% penalty would be assessed on the withdrawal. The remaining monies could then be put into the ABLE account. Obviously this new law is an important change. It is important to note that the rollover will count toward the total amount of contributions allowed to the ABLE account in the year of the transfer.
The new tax law also included a piece of legislation designed to broaden ABLE accounts. Specifically, the law provided that if a person with special needs is working, he may put monies into his ABLE account in excess of the maximum funding limit, which is currently $15,000 per year. The worker with special needs may contribute monies up to the lesser of the amount of his earnings or the federal property limit, which is currently $12,060 (2018). This could greatly assist a disabled worker by allowing him or her to save a significant portion of his earnings in an account that will not affect his or her eligibility for public benefits as a typical retirement savings account or IRA would. In order to make this extra contribution, the worker cannot be a participant in an employer sponsored 401k or other type plan, but this would generally not be recommended for a person receiving public benefits as the plan would be a countable resource.
One piece of pending legislation that was not included in the new tax bill was the extension of eligibility of ABLE accounts to persons whose disability manifested before age 46. Under the law, ABLE Accounts are still only eligible for persons whose disability manifested before age 26. If you would like more information about the interplay between ABLE accounts and public benefits, please call McAndrews Law Offices at 610-648-9300 to schedule a consult or contact us by clicking here.
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