More Than 20 Years Of Experience Building Lifelong Relationships

Tax-Free Rollovers from 529 Savings Plans to Able Accounts Now Permitted

| Oct 3, 2018 | Firm News |

Helena S. Mock, Esq.

In a previous blog, I wrote about the enactment of the ABLE (“Achieving a Better Life Experience”) Act, which was signed into law in 2014.The ABLE Act is a federal law that allows states to establish a savings program for persons with disabilities.ABLE accounts may be used to accumulate money for a disabled beneficiary.The funds in an ABLE account can be invested and grow free from all income taxes.The money can later be used by or for the beneficiary for purposes such as education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and other “permissible expenditures.

The ABLE account is modeled after the 529 education savings plan, which allows savings for future college expenses to grow free from income tax.You don’t get a federal income tax deduction for contributions into the plan, but the earnings on the account aren’t taxed while the funds are in the program. The custodian of the plan can also change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without income tax consequences.And, distributions from the program are tax-free up to the amount of the student’s “qualified higher education expenses.” These include tuition (including up to $10,000 in tuition for an elementary or secondary public, private, or religious school), fees, books, supplies, and required equipment. Reasonable room and board are also qualified expenses if the student is enrolled at least half-time.

Often 529 college savings accounts are established by parents or grandparents for an infant or young child before knowing if that child will ever be able to attend college.If that child later suffers a disability such that he will not need the funds for “higher education expenses,” what happens to the funds in the 529 account?As mentioned, the custodian can change the beneficiary.But that money was set aside for this child.And, this child will have other needs. Why can’t those funds be used for her other needs?

Under the law, the distribution of funds from a 529 account for any purpose other than for qualifying expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax is also imposed. However, under the Tax Cuts and Jobs Act of 2017, amounts from a 529 account can now be rolled over to an ABLE account without penalty so long as the ABLE account is owned by the designated beneficiary of the 529 account, or a member of the designated beneficiary’s family.Not only is this useful if the beneficiary himself has become incapacitated such that he will not need the funds for educational purposes, but it is also useful if the beneficiary has completed his education and there is money left in the account which can be rolled over from the 529 account to an ABLE account for the benefit of a member of the beneficiary’s family who is blind or disabled.

Certain rules and limitations apply, and therefore you should consult a qualified special needs planning attorney to discuss your individual situation before taking any action.