Saving for college is not an easy task, and many people don’t know where to start. There are many different investment strategies that you can use, so which one is right for your family? If you have a child at home with a disability, then a 529A (ABLE account) might be a great choice to help them save for college! ABLE accounts were started in 2014, and they serve as a tax-advantaged savings account for people with disabilities. The participant is the account owner, and the child is listed as the beneficiary. Anyone is allowed to make contributions with post-tax dollars for a total annual limit of $17,000 as of 2023 (the contributions will not be tax deductible at the federal level, check with your state about state deductions). Recently, these accounts have received some favorable treatment by Congress. In previous years, individuals only qualified if they incurred their disability before the age of 26. As part of the SECURE 2.0 Act individuals who are age 46 and under will qualify for ABLE accounts, a 20-year age increase! With the increase in age requirement, an estimated 6 million Americans will benefit. (Including 1 million veterans)! ABLE accounts tend to have higher fees since they are run by private program managers. Don’t turn a shoulder to this opportunity yet, many states (including Iowa) are working with these program managers to lower these fees! There were already two fee reductions, one in July 2022 and another in January 2023[i].
Are you afraid your children won’t receive any financial aid based on your family’s income and assets? ABLE accounts are not listed as a countable asset for financial aid purposes, and all growth is tax-free if distributions are used for qualified expenses. “What if my child doesn’t go to college?” There are lots of expenses that are qualified under this type of account. For example, housing, transportation, assistive technology, health and wellness expenses, legal fees and basic living expenses like food are all considered to be qualified along with education expenses[ii]. The rules are flexible because living with a disability or caring for someone with a disability can bring on more challenges financially. No enrollment or special request is necessary for distributions related to qualified disability expenses, however the ABLE National Resource Center does recommend keeping receipts of all qualified expenses for audit purposes, if the IRS deems one fit. If an ABLE account is misused, there is a risk of penalty and qualification for future benefits. For families in higher tax brackets, this can be a huge benefit with tax-free growth and tax-free distributions for a plethora of expenses.
These accounts are labelled as college-savings accounts, but as you can see, they can be used for a wide range of expenses that people may incur throughout their lifetime. It takes a lot of financial stress off the individual and their family knowing they have funds available that won’t be decimated by taxes.
This adjustment to the ABLE Act may help millions of people in the coming years. Lower fees, tax-free growth and tax-free distributions offer multiple ways to save. This might just be a smart financial move for you and your family. Please contact PrairieFire today for a complimentary “Paying for College” assessment.