Tag Archives for " 529 "

Mar 03

How should I use the 529A Account?

By Chris Chen CFP | Financial Planning

How should Iuse the 529 Account?

author: Julia Wolf thru wikimedia commons; http://creativecommons.org/licenses/by-sa/2.0/deed.en; no changesThe first part of this post described 10 key features of the new 529A Account created by the ABLE Act that was passed by Congress in December 2014.  Let us know if we can send you a copy or a link to the entire article.  This second and final part discusses implications for disabled loved ones.

The 529A comes with built-in advantages such as relatively low costs (expected), tax advantages, and the ability to have up to $100,000 in assets without jeopardizing access to public support programs.

The new plan should be very attractive to many middle class families. Similar to the intent of the the 529 college plan for college bound students, the 529A allows families to set aside money for their disabled loved one, and use it as needed, while limiting the impact of unforeseen expenses on their lifestyle.

However, the 529A has restrictions for annual contributions and maximum balance which may make an account delicate to manage. It is not a vehicle for disabled people to accumulate more than $100,000. In fact due to the relatively low balance limit, the vagaries of market fluctuations that it may be subjected to, and the inevitable withdrawals that will occur, many people will want, if they can afford it, to supplement a 529A with a Special Needs Trust.

Due to the contribution limit, the accumulation phase of the 529A could last up to 7 years, making accumulation a medium term investment horizon. Perhaps one way to manage accumulation would be to contribute $14,000 for three or four or five years and then let the investment grow (hopefully to $100,000) over time. The distribution phase starts as the balance approaches $100,000. While it appears that according to the rules the beneficiary’s Supplemental Security Income will suspend when the balance goes over $100,000, it is not clear yet how this suspension would be implemented. Will “any” peak above $100,000 trigger the suspension? Or will it be the balance as of an arbitrary date, say at the end of the month? Rules and regulations are still being written, so we don’t have that answer yet.

Nonetheless, the key is that the balance will have to be managed, and drawn down as necessary so as not to exceed the magic $100,000 balance limit. Given the general upward bias of financial markets, it would imply that it may be best to 1) manage the balance to a level of safety below $100,000 like, say, $90,000; and 2) plan a periodic monthly withdrawal to cover ongoing expenses.

Using the 529A as a checking account cum investment account is not necessarily optimal. Most of us dissociate our checking accounts from our investment accounts for good reasons. And yet, the 529A seems to be designed to be used as both, primarily because 529A investment earnings are expected to be tax free (checking accounts are effectively tax free since they have no earnings to tax). Hence the only way to earn a windfall from the 529A is to invest.

Many readers will be familiar with the sequence of return problems that can come with a retirement account: when a new retiree takes initial withdrawals in the same period that the financial markets experience a downturn, the risk of running out of money before end of life increases tremendously. The same will be true for the 529A, especially since the time horizon can be so much longer than for retirement. While a 30 year retirement is common, it is likely that many 529A beneficiaries will need their account for up to 60 years or longer. In the absence of a party willing and able to replenish the account, for instance, by another relative after the parents pass away, 529A accounts may still need to be supplemented by Special Needs Trusts. Actually, 529 accounts fit well as a stop-gap before Special Needs Trusts are funded, as many Special Needs Trusts remain unfunded until life insurance pays up after the death of the parents.

Since 529A accounts are not offered yet as of the time of this writing, we don’t know what kind of investment options will be available. As mentioned, the accumulation phase could be for as little as 7 years, which makes it a medium term investment horizon, followed by a very long distribution phase (up to 60 years or longer) during which the main investment need will be for income, and the need to manage the balance to under $100,000. That is very different from 529 College plans which have up to 18 years accumulation and then distribute over a 4 to 5 years period.

States which will offer 529A Plans will be well advised to propose different investment offerings than those offered for their college plans. For instance, the standard age based investment options currently offered by most college plans will probably not be appropriate. In addition, because participants will sometimes draw from the 529A account in declining markets, they will likely demand solutions that are relatively insensitive to downward market fluctuations. The temptation will be to leave it in cash or near-cash, thus giving up on a critical feature, the ability to grow investments tax-free.

The 529A is not a perfect vehicle. However, it is a great new tool to help disabled people. It will allow more families to plan support for their disabled family members with an easy-to-use framework that should be relatively low cost and may provide additional funding in the form of tax free earnings. In addition, 529A Accounts supplement rather than replace Special Needs Trusts by filling a gap for the period before Special Needs Trusts are funded

Let us know if you would like a copy of  Part 1 and Part 2 of this article on the new 529A, or if you have further questions.

(A previous version of this article originally appeared in nerdwallet.com)

Feb 13

10 Things to know about the 529A

By Chris Chen CFP | Financial Planning

Ten things to know about the 529A Account

529AIn the week leading up to Christmas 2014, the US Congress passed the Achieving a Better Life Experience Act (the ABLE Act) , creating the 529A account to provide tax advantaged benefits for disabled individuals. It is a significant change to the financial planning landscape for special needs beneficiaries, with the potential for helping many families with disabled members.

The 529A plan is modeled after the Section 529 College Savings Plans, which are widely used for college planning. The 529A account is meant to allow tax advantaged accumulations and distributions for a wide range of expenses for the disabled beneficiary. The following lists some of the specifics, similarities, and differences that the 529A Account features:

1. The 529A Account uses the Social Security definition of disability. In addition it can benefit only people who have been diagnosed with a qualifying disability prior to age 26.

2. Like the 529 College Plans, the 529A plans will be set up on the state level. Presumably, the same state agencies that oversee the 529 College Plans will be responsible for the 529A, although that may differ from state to state.

3. There can be only one 529A account per beneficiary, normally in his or her state of residence. That is different from the 529 college plans, for which there is no limitation on which state plan is used, and where the distributions are made.

4. Spending for a beneficiary can occur only in his or her state of residence. This will allow simplified compliance verification for federal and state agencies.

5. Contributions in the 529A are with after tax money and are limited to $14,000 a year (in 2015) for each beneficiary from all sources. Individual states may choose to provide additional tax benefits.

6. Investment growth in the 529A is tax-free.

7. Distributions are tax-free so long as they are used for qualified expenses. Otherwise, earnings on distributions are taxed at ordinary income rates with a 10% penalty added. Qualified expenses include housing, transportation, health and wellness, education and more.

8. Having a 529A does not disqualify the disabled individual from Federal and State aid, such as Supplemental Security Income or Medicaid, so long as the amount held in the 529A does not exceed $100,000. Effectively that caps the 529A Account to $100,000.

9. Should the 529A account balance exceed $100,000, Supplemental Security Income would be suspended, but not terminated. Once the balance falls below $100,000, benefits would be resumed.

10. The limitations on contributions and on balance levels suggest that the 529A could be used as a hybrid between an investment account and a checking account.

In the next post we will discuss some of the subtleties and implications of the 529A for planning for disabled love ones.  Let me know if you would like me to email you a link to the next post!

(a previous version of this post appeared on Nerdwallet.com)
Jan 04

Ready & ABLE: 529A, a New Planning Tool for Disabled Family Members

By Chris Chen CFP | Financial Planning

Ready & ABLE: 529A, a New Planning Tool for Disabled Family Members

529AIn the week leading to the Christmas holiday, the US congress passed the ABLE Act of 2014 as part of the Tax Increase Prevention Act of 2014. ABLE stands for Achieving a Better Life Experience. The Act creates the new 529A plan. It is a significant change to the financial planning landscape for special needs beneficiaries.

The 529A plan is modeled after the Section 529 College Savings Plans, which are widely used for college planning. The 529A is meant to help people with disabilities as defined under Social Security rules and will allow tax advantaged distributions for certain expenses for the disabled beneficiary including housing, transportation, health and wellness, education and more without disqualifying the disabled individual from Federal and State aid.

As with the current 529 plans, for funds not used for qualifying expenses, any investment growth would be taxed as ordinary income plus a 10% penalty. Additionally, the funds can be rolled over tax-free from one ABLE account to another and the designated beneficiary can be changed from one disabled person in a family to another in the same family.

In theory the 529A will be limited to the same maximums that apply to 529 plans in their respective state. However, in practice the maximum amount that can be held in a 529A will be limited to $100,000.  Above that amount, the beneficiary may lose his or her qualification for Medicaid coverage.  In addition, a maximum of $14,000 can be contributed annually to a 529A.

There are other differences between the 529A and the current 529 plans. For example, it appears that the 529A will only be able to be used in the beneficiary’s resident home state. Hence, if the beneficiary moved, it may require rolling over the 529A from one state plan to another. That is different from the college 529, for which families can use the best state plan that they can find, including out of state plans.

The 529A is a great new tool to add to the panoply available to help disabled people. It will allow more middle-income families to plan support for their disabled family members with an easy to use framework that should be relatively low cost. The 529A comes with built-in advantages such as lower costs and tax advantages. On the other hand, there are restrictions for annual and maximum contributions to the 529A. On balance, the new plan should be very attractive to many middle class families.

It will take some time for 529A rules to be finalized and for states to roll out the plans. Hopefully, Massachusetts will be at the vanguard!

(an earlier version of this article also appeared in the Boston Globe)