If you began saving money for your child’s education in a 529 plan, you probably were planning to use that money on your child’s education at some point in the future. For children with special needs, money for expenses related to their special needs may be needed more. Fortunately, recent changes to the tax laws could help.
What Is a 529 Plan?
A 529 plan is a special account that allows parents to save money for their child’s education. Parents can invest the money kept in the account tax-free, as long as the proceeds get used for educational expenses such as college tuition. The new tax laws expanded how you can use 529 money. Now, instead of just post-secondary (college) expenses, you can spend the money on private school tuition if you wish.
To avoid jeopardizing your child with special needs’ eligibility for government benefits, you or another relative should be the 529 accountholder. Your child should be the listed beneficiary.
Can You Use Money in the 529 Plan for Special Needs-Related Expenses?
The new tax laws make it easier for you to use money saved in a 529 plan for special needs-related expenses, instead of educational expenses. Before the laws passed, you could have faced tax penalties for withdrawing money from the 529 plan and spending it on something besides educational expenses. Now, you can roll over money from the 529 plan into an ABLE account (a kind of savings account for people with special needs).
Once the money is in the ABLE account, you can use it to pay for special needs-related expenses. The rollover amount does count towards the ABLE account’s $15,000 total yearly contribution limit. Before making a rollover, you should consider how much money has been contributed to the ABLE account this year already.
Please keep in mind that money saved in 529 plans is protected from Medicaid payback. The government will not be able to get repayment of Medicaid costs from a 529 plan that benefits a person with special needs who passes away. In contrast, the government can request payback from an ABLE account. Any money that you move from a 529 plan to an ABLE account is now at risk of being taken by the government if your child passes away. It may make sense to move only the money you need now to the ABLE account, without cleaning out the 529 plan entirely.
Rubin Law is the only law firm in Illinois exclusively limited to providing compassionate special needs legal and future planning to guide our fellow Illinois families of children and adults with intellectual disabilities, developmental disabilities, or mental illness down the road to peace of mind. For more information, email us at firstname.lastname@example.org or call 866-TO-RUBIN.