The sudden transition from my wife’s eight-week stay in the high-risk obstetric unit to her emergency C-Section caught me off guard to say the least. Sure I had a long time to prepare and picture the scenario, but the amount of doctors and nurses coupled with the gravity of the situation would justifiably unnerve anyone. Even though my son, Hill, had a short NICU stay, his long-term health prognosis was still unknown.
After dragging Hill to a slew of doctors including pediatric neurologists, cardiologists, pulmonologists etc., I began to contemplate his future regarding sports, education etc. His older sister always thrived at school and even sports like soccer. In fact, the first few months of her life were the opposite of unknown. Her development and future were so bright that my financial planner mindset kicked in immediately as I opened up a 529 college savings account (a.k.a. 529 plan) for her.
529 College Saving Plan Basics
A 529 plan is used as a savings vehicle for parents to pay for college. Each state chooses a financial institution (Charles Schwab, Vanguard, TD Ameritade etc.) to invest on behalf of each account holder. These are aptly named after Section 529 of the United States tax code, which specifies the rules and restrictions on education plans. Fees on 529 plans are low and parents get to choose an array of investment vehicles. Earnings grow tax-deferred and are tax-fee when withdrawn for college education expenses. Even small contributions to 529 plans can make a large difference in paying for college when invested over time.
Saving for Special Needs Children
Hill is a happy and healthy 6 year-old now. However, I remember researching the ways to save for children with special needs during our hospital stay in case one of those statistics from our early NICU consults were proven true. Many families rely on government support, which have very strict thresholds to qualify for Medicaid or Supplemental Social Security benefits (under $2,000 in household assets). Subsequently, Americans dropped out of the work force as they did not want to earn too much to disqualify for government benefits. Congress recognized this problem and just passed the ABLE Act in December of 2014. (Achieving a Better Life Experience) https://www.congress.gov/bill/113th-congress/house-bill/647.
The ABLE Act has paved the way for parents to open 529A accounts (similar to 529 plans). Anyone living with significant disabilities or special needs that have been diagnosed prior to age 26 with a condition expected to last more than 12 months are eligible for a 529A plan. Account holders also have to meet the disability criteria for Supplemental Social Security. (http://www.ssa.gov/ssi/text-child-ussi.htm)
Over six million disabled Americans may become immediately eligible to open a 529A once the bill is implemented by each state sometime in 2015.
Features of 529A Accounts
- $14,000 max annual contributions (total not per person)
- First $100,000 in savings would be exempt from the SSI $2,000 threshold (this would not effect Medicaid though)
- Contributions are not tax-deductible but earnings grow tax-deferred
- Tax-free withdrawals for anything disability related
Regular 529 education plans have helped millions of parents ease the burden of paying for college as tuition has outpaced inflation for decades. Similarly, 529A accounts will greatly assist helping pay for the $2 million in lifetime costs associated with special needs children or those with disabilities. Bottom line: 529 A plans have the potential to provide lifetime financial support for your special needs child.
Differences between 529 and 529A plans
|529 Savings Plan||529A Plan|
|Eligibility||Anyone Can Open||Disabled/Special Needs|
|Owner||Account Holder (i.e. parent)||Beneficiary of Account|
|Withdrawal Uses||Tuition, Curriculum Books, Campus Room and Board, etc.||Education, Housing, Training, Health Care, Financial Management, etc.|
|Contributions||$14,000 Annually||$14,000 per Person not to exceed the cost of education|
|Early Withdrawals||10% penalty||No Penalty as contributions are irrevocable|
Each state will continue to hammer out the details to make 529A plans easily accessible by mid- 2015 to early 2016There are additional avenues to save for college or for children with special needs including Special Needs Trusts, Pooled Income Trusts, IRA’s, College Tuition Plans, Coverdell ESA’s etc. In the meantime, please follow up with your financial advisor to make them aware of the ABLE Act (529A plans.)