Kids across the country are headed back to school. Which means education-related objectives are on everyone’s minds these days. That makes this the perfect time for you to think about planning for your child’s educational future!
Did you catch our latest #askENABLE video that we shared on Facebook and IGTV earlier this week? In it, our founder and president, Phillip Clark, discussed the similarities and differences between traditional 529 college savings plans and the more recently developed 529 ABLE accounts.
Here’s a quick recap of what we shared about these two types of 529 planning vehicles:
What is a 529 College Savings Plan?
According to SavingForCollege.com, a 529 is a “college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs.”
What are 529 ABLE Accounts?
Since 2014, ABLE accounts have allowed families to save more than $2,000 for their child with special needs without losing access to key government benefits. In fact, you can save up to about $300,000 while maintaining your medicaid services (states vary slightly in the max that can be saved in an ABLE account). $100,000 is the max you can accumulate without impacting your SSI.
As of 2018, you can contribute up to $15,000 annually to your ABLE account.
In June, we shared a series of posts about ABLE accounts. If you missed them, you can check them out by visiting the following links:
Similarities between the two types of 529s:
- They allow you to shelter income
- They provide key tax benefits
- Contributions to the account can be made by any person (the account beneficiary, family and friends)
- Contributions must be made using post-taxed dollars and will not be tax deductible for purposes of federal taxes
- They offer different investment options
- Funds from the accounts can only be used for qualified expenses
Qualified Expenses: 529 Plans
Qualified expenses include tuition and fees, books and materials, room and board (for students enrolled at least half-time), computers and related equipment, internet access and special needs equipment for students attending a college, university or other eligible post-secondary educational institutions.
Transportation costs, health insurance and student loan repayments are not considered qualified expenses.
The Tax Cuts and Jobs Act of 2017 also allows tax-free distributions of up to $10,000 per year, per beneficiary to pay for K-12 tuition expenses at private, public and religious schools.
The earnings portion of a non-qualified withdrawal may be subject to federal and state income tax, as well as a 10 percent tax penalty. Since your contributions were made with after-tax money, they will never be taxed or penalized.
Qualified Expenses: ABLE Accounts
A “qualified disability expense” means any expense related to the designated beneficiary as a result of living a life with disabilities.
These may include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other expenses which help improve health, independence, and/or quality of life.
(Source: ABLE National Resource Center)
Key Differences between the two types of 529s:
- ABLE accounts are only for individuals with disabilities and their families. In fact, the ABLE Act limits eligibility to individuals with significant disabilities with an age of onset of disability before turning 26 years of age.
- With traditional 529s, the beneficiary is often different from the account owner. With ABLE accounts, the beneficiary of the account is the account owner.
- 529s can only be used to cover education-related expenses. ABLE accounts can be used to cover many additional expenses related to having a disability.
- Unlike 529 plans for education savings, ABLE accounts are direct-sold only. An individual/family has to open and mange its own account.
- ABLE accounts have a Medicaid payback requirement.
If you have additional questions about 529 college savings plans and/or ABLE accounts, ask them here or reach out to our team directly by emailing us at info@ENABLEsnp.com.
We’d love to help you think through how these two types of planning vehicles may be helpful to your family’s future planning!