PROVIDING ASSISTANCE TO LOVED ONES FOR HIGHER EDUCATION OR SPECIAL NEEDS THROUGH PLANS 529 AND 529A (ABLE Act)

Phillip G. Gubler and Thomas J. Bayles, Attorneys at Law

Historically Section 529 of the Internal Revenue Code has applied only to tax savings related to  higher education;  however, the new Section isthI529A, the ABLE Act, was recently enacted to provide a convenient way to help a loved one with special needs. 

There are tax advantages for using the 529 Education Savings Plan.  Funds placed in a 529 account can grow without having to pay tax on the income as long as the funds are used by the beneficiary for qualified higher education expenses.  A qualified higher education expense includes payment for tuition, books and supplies, as well as room and board if the beneficiary is enrolled at least half time.  This is appealing for many as a means to contribute to a child’s or grandchild’s education without paying income tax on the increase in the investment, and the contributor may qualify for a state income tax credit for the funds placed in the 529 account.  Although it is most common for a parent or a grandparent to create and fund a 529 account for a child or grandchild, anyone can contribute.  The owner of the 529 account and the beneficiary do not have to be related.       

If a beneficiary decides not to pursue higher education, the 529 account can be transferred to another member of the beneficiary’s family, or the funds can be withdrawn.  However, if the funds held in the 529 account are not used for qualified higher education expenses, the contributor may be required to pay income tax and a 10% penalty on the earnings.  

The 529A plan, also known as the ABLE Act (Achieving a Better Life Experience), was signed into effect in December 2014.  The goal of the 529A plan is to provide supplemental benefits to a disabled beneficiary.   This will allow families with a disabled child a way to save for that child’s long-term disability expenses that are not otherwise covered by needs-based government programs.  There are a number of qualifications for the 529A, such as the beneficiary must be disabled before age 26; and disqualifications and taxes will apply if the account balance exceeds $100,000.00.  Any funds remaining in the 529A account upon the disabled beneficiary’s death must be paid to the State up to an amount equal to the total medical assistance paid by the State on behalf of the disabled beneficiary.

The 529A Plan is not available for use yet because the States are waiting for Federal regulations to be enacted to clarify several aspects of the ABLE Act.  However, it looks like a step in the right direction to allow parents and grandparents to provide for a disabled child.

JensenBayles, LLP provides a broad spectrum of legal services.  Thomas J. Bayles has been actively providing advice in the areas of trusts, wills, probate and tax planning in the St. George market for over 15 years. Please visit our web site www.jensenbayles.com or call 435-674-9718 and ask for Thomas J. Bayles or Phillip G. Gubler.  The information in this article is for educational purposes only and is not intended to be construed as legal advice.