By Debbie Haines, Partner

What is a 529 college savings plan and what should you do if it has been set up for a disabled beneficiary who will never attend an institution of higher learning? A 529 college savings plan is operated by a state or educational institution so that families can set money aside for future college costs. If you withdraw from the 529 account and do not use the money for higher education, a 10% penalty is levied on the earnings that must be included in income. However, there is an exception to the penalty if the beneficiary is disabled. The penalty is waived if made because the beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can’t do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. The earnings will still be taxable even if the penalty is waived. (There is a penalty if you don’t use the funds for educational purposes.) Another option is to rollover the account to a different beneficiary.

An excellent option to help a disabled beneficiary is to set up an ABLE account (ABLE = Achieving a Better Life Experience) for them. An ABLE account is set up at the state level and it is a nice option similar to a 529 plan that can be used to pay for disability expenses such as education; housing; transportation; employment training and support; assistive technology and personal support services; health, prevention, and wellness; financial management and administrative services; legal fees; expenses for oversight and monitoring; funeral and burial expenses; and any other expenses approved under IRS regulations.

Basic rules for ABLE accounts are listed below:
• The eligible individual, also referred to as the designated beneficiary, is the owner of the account.
• Another person, such as a parent or legal representative, may open, set up and manage the account on behalf of their loved one.
• Each eligible individual may have only one ABLE account.
• Contributions to the account may be made by anyone (the beneficiary, family and friends).
• Annual contributions are currently limited to $14,000 (this amount will be adjusted annually for inflation).
• Account values above $100,000 will impact Supplemental Security Income (SSI) eligibility.
• Most states suspend contributions once the account value reaches $500,000 but they continue to accrue interest in earnings.
• Residents of any U.S. state may open an ABLE account.

Virginia will be offering ABLE accounts later this year. Currently only Florida, Nebraska, Ohio, and Tennessee have active ABLE account programs. You also will be eligible to get a deduction up to $2,000 on a Virginia income tax return for ABLE contributions to a Virginia plan beginning with the 2016 tax year. If the contributor has attained age 70, he or she may deduct the entire amount contributed to an ABLE account, less any amounts previously deducted. This is a great option for grandparents who want to help a disabled grandchild. This same 70 and over rule in Virginia also applies to Virginia 529 college savings plan contributions.

Unfortunately, you cannot roll over a 529 plan into an ABLE account.

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