On December 22, 2017, new tax legislation was signed into law by President Trump. The new tax law impacts ABLE (Achieving a Better Life Experience) plan accounts for the 2018 tax year. Modeled after 529 college savings accounts, ABLE accounts allow individuals with qualifying disabilities and their families to save for a wide range of disability-related expenses. The federal tax-free savings and investment options are offered to encourage individuals with a disability and their families to save private funds to support health, independence and quality of life. The annual contribution limit for an ABLE account for 2018 is $15,000. The contributions and the tax-free growth of the contributions may be used by individuals with a disability for “disability related expenses” without interfering with the individual’s eligibility for public benefits such as SSI and Medicaid.
529 Rollovers to ABLE Plans
New for 2018, owners of 529 college savings accounts are allowed to rollover the account to an ABLE account, up to the ABLE annual contribution limit. The annual contribution limit is $15,000 for 2018. This rollover can occur for a child with a disability who is unable or uninterested in attending college.
Before choosing to rollover a 529 college savings account into an ABLE account all options must be carefully considered. Under the new tax laws, distributions from a 529 savings account are no longer limited to just college expenses. Now funds from a 529 account can also be used to pay for education expenses in public and private schools for children in kindergarten through high school (these distributions are limited to $10,000 per year).
In order for the rollover to be protected from federal and state taxes, once the funds are withdrawn from the 529 plan, they must be received by the ABLE plan within 60 days of the withdrawal.
Contributions to ABLE for Employed Account Owners
Another new benefit for ABLE account owners relates to account owners who are employed. If the account owner is employed, they may be able to contribute more than the annual $15,000 contribution limit for 2018. In order to be permitted to make this additional contribution, the account owner must not have contributed to a defined contribution plan, annuity contract or a deferred compensation plan for the 2018 tax year. The beneficiary is permitted to contribute an amount over the $15,000 contribution limit up to the lesser of the amount of their annual compensation or the federal poverty level for the prior year (for 2018 you would look at the 2017 poverty level, which is $12,060). This additional contribution that exceeds the annual contribution limit must be made by the account owner.
Savers Credit for ABLE Account Contributions
Another change, is the availability of the Saver’s Credit of up to $1,000 to the designated beneficiary of an ABLE Account. The credit is not available to others making contributions, only the designated beneficiary. In order to qualify for the Saver’s Credit, the designated beneficiary must be an eligible lower-income taxpayer. It is also important to know that the credit is only beneficial where the designated beneficiary will owe income tax because the credit is non-refundable.
To learn more about ABLE accounts and special needs planning, please contact OWM Law at (610) 323-2800 and schedule an appointment.
— Written by Rebecca A. Hobbs, Esq.
DISCLAIMER: The contents of this blog are not legal advice, and are not to be used for that purpose. If you are faced with a legal matter, you should contact a lawyer immediately in order to ensure that you are protected.