This is a very informative article inThe Wall Street Journal written by Anne Tergesen about 529 ABLE accounts. She does a great job of explaining what ABLE accounts are and how they'll be expected to work.
529 Plans Open Doors to Disabled From Any State
Similar to college-savings plans, ABLE accounts to offer investment without restriction to home states plan
By Anne Tergesen
A year ago, Congress created the 529 ABLE account, a savings vehicle for disabled people that offers the same tax-free growth available in 529 college-savings plans. Now, thanks to a tax law passed last month, consumers eligible to open a 529 ABLE account will be free to select a plan sponsored by any state, rather than being restricted to their home states plan.
That change will make it possible for people across the country to start one of these accounts as soon as the first state program opens for businesssomething that is likely to happen in the coming months.
Over time, experts expect there to be competition among states to attract out-of-state residents to their 529 ABLE programs, which may result in lower fees and better investment options for consumers.
About 35 states have passed legislation to sponsor ABLE programs, saidSara Hart Weir,president of the National Down Syndrome Society, which lobbied for the accounts. Officials in Nebraska, Virginia and Florida say they plan to make 529 ABLE accounts available in 2016.
Mary Morris,chief executive of Virginia 529, said Virginia is likely to launch its ABLE program in the second half of 2016.
In many ways, 529 ABLE accounts resemble 529 plans. A disabled person or friends and relatives can make one-time or regular contributions, which grow tax-free if they are used for qualified expenses. In the case of the 529 ABLEs, that includes education, housing, transportation and employment training. If used for other purposes, investment gains are subject to income tax and a 10% penalty.
The account owneror a parent or guardian appointed to make decisions on behalf of that disabled individualwill pick from the plans investment options, which are expected to include money-market funds and stock and bond mutual funds.
The biggest benefit of an ABLE account is that disabled individuals can have as much as $100,000 in one and still qualify for benefits including Medicaid and Supplemental Security Income (SSI), a federal program for disabled people with low incomes. Previously, to qualify for SSI, a person could have no more than $2,000 in assets. Traditionally, Medicaid had a similar asset cap.
To qualify for an ABLE account, a minor or adult must be blind or have a severe physical or mental disability before age 26, saidLen Weiser-Varon,an attorney in Boston who specializes in state-sponsored savings programs. The person must also be entitled to SSI or Social Security Disability Insurance benefits, or, with some exceptions, have a doctors diagnosis.
Now that these programs can attract contributions from other states residents, experts say it is unclear whether all the states that passed legislation will set up their own plans. Some may put their programs on hold and reassess once the initial 529 ABLE plans are operating, to see whether the market is big enough to accommodate additional players.
Others may opt to subcontract with another state or join a multistate consortium to achieve economies of scale to reduce investment costs and account fees, saidBetty Lochner,chairwoman of the College Savings Plans Network, which includes officials involved with 529 programs, and director of Washington states Guaranteed Education Tuition college savings plan.
Nobody really has a good sense for how big the potential market is, but it is clear that it is not nearly the size of the college 529 market, which has more than $258 billion in assets, said Michael Kitces, director of financial planning at Pinnacle Advisory Group Inc. in Columbia, Md. States that are among the first to enter the market may attract most of the assets, he added.
Experts say families who want to maximize their contributions to these accounts should set one up in 2016, even if there are relatively few plans to choose from. The reason: Annual contributions to 529 ABLE accounts are currently capped at $14,000 per beneficiary, and each beneficiary is restricted to just one such account. Such limits, which are far below those that apply to 529 college-savings accounts, make it harder to amass significant savings with 529 ABLE accounts, saidJamie Canup,who, as head of the tax department at Richmond, Va., law firmHirschler Fleischer,serves as a consultant to states on 529 ABLE plans.
Families may want to wait until the final months of 2016 so they can select from as many choices as possible. But they should keep an eye on offerings from other states that enter the market. If they find a plan with lower fees or better investment options they can initiate a tax-free rolloveror transferof their assets from one state plan to another, said Mr. Canup.
As with 529 college plans, some states may offer a state tax break for using your home-state plan. States that currently intend to offer one include Oregon, Iowa, Missouri, Montana, Nebraska, New York and Wisconsin, said Ms. Weir.
If maintaining SSI benefits, which are suspended once a disabled persons assets reach $100,000, isnt a concern, a family may also want to shop for a state plan that allows them to set aside the most money possible. On average, state 529 ABLE programs cap the balance on these accounts at $300,000 per person, but some states say they plan to allow participants to amass as much as $480,000 in savings, said Ms. Weir.
For families that can fund a special-needs trust, deciding whether to use that or a 529 ABLE accountor bothis complicated. Because these trusts typically cost from $2,000 to $5,000 to set up, they often make sense only if there is at least $50,000and potentially far moreavailable to invest, said Mr. Canup.
With the trusts, investment gains are taxable. But families can make unlimited contributions without affecting a beneficiarys eligibility for government benefits.
Perhaps the biggest downside to an ABLE account applies to beneficiaries who receive Medicaid. If beneficiaries die with money in ABLE accounts, a state has a right to seek repayment for Medicaid benefits received after creating the ABLE account. In contrast, when the beneficiary dies, a special-needs trust isnt required to reimburse the state for Medicaid benefitsunless the beneficiary funded the trust with his or her own earnings or savings.
Source: http://www.wsj.com/articles/529-plans-open-doors-to-disabled-from-any-state-1452162541
