“A New Tax-Deferred Savings Plan”

By now, most folks are familiar with the advantages of saving for college through a 529 college savings plan.  The State of Alabama passed similar legislation that allows people to save and invest on behalf of people with disabilities.  It’s called the ‘Achieving a Better Life Experience Act’ with the nick-name ‘ABLE’ accounts.  Here are the key points on how it works:

  • While contributions to an ABLE plan are not tax deductible for federal income tax purposes, once deposited, the funds grow tax deferred. In other words, your interest, dividends and capital gains on investments are not reportable on your annual income tax return.
  • Withdrawals, when used for qualified expenses, are not subject to income taxes. What qualifies as a qualified expense is relatively broad and includes such things as housing, health care costs, assistive technology and special education services and tutoring.
  • Anyone can contribute to the account…you, a parent, grandparent, relative or even a trust. The contributor to the account can also be the account owner and thus control the funding, distributions and investments.  Deposits must be made by check, electronic transfer or payroll deposit and bank auto-deposits are allowed to facilitate auto-investing.  Unlike a 529 College Savings Account where multiple accounts are allowed, there can only be one ABLE account per participant (beneficiary).
  • Contributions and account balances up to $100,000 do not effect resource-based benefits such as SSI, SNAP and Medicaid. Pre-ABLE accounts, a person with disabilities with assets exceeding $2,000 did not qualify for such benefits.  Likewise, money withdrawn from the ABLE account to pay for qualified expenses, are not included in the calculation for resource-based benefits.
  • The maximum annual contribution limit to the ABLE account is $14,000. As a reminder, $14,000 is the maximum amount you can gift an individual free of gift taxes in any given calendar year.  Total contributions to an ABLE account cannot exceed $360,000 but the account value can exceed that amount.

Investment options.  One thing I really like about Alabama’s ABLE accounts is that they use Vanguard Funds as the investment vehicle.  Vanguard is a well-known low-cost leader for no-load mutual funds.  They have grouped your investment options into several categories:

  • Growth Option: Roughly 80% stocks; 20% bonds suitable for a 10-year+ time horizon
  • Moderate Option: Roughly 60% stocks; 40% bonds and cash suitable for a 5-year+ time horizon
  • Conservative Option: Roughly 30% stocks; 70% bonds and cash suitable for time horizon under 5 years.

Who is eligible?  Anyone of any age who has an ‘eligible disability’ that occurred before their age twenty-six is allowed to open an ABLE account.  In addition, certain other individuals whose disability falls under certain parameters as outlined under the ACT is also allowed to participate.  For more  details, CLICK HERE.

If you know someone with significant disabilities, let them know about the ABLE 529A Savings Plan.  Just as there is no way to better invest and save for college than a 529 College Savings Plan, the ABLE plan is equally as good a strategy.

If you’d like to have me answer your financial question email me at stewart@welchgroup.com and place AL.com in the subject line.  Consult your own professional legal, tax or financial advisor before acting upon this advice.