CMP Financial Planning

529 or STABLE account?


I recently gave a presentation where many questions were asked about STABLE accounts and when they might be the most appropriate savings/investment vehicle for the individual with a disability. This article addresses one of those questions: whether it is preferable to use a 529 account or a STABLE account to save for a loved one’s future education needs.  What are 529 accounts?
529 accounts are tax advantaged plans managed by the state that allow families to save for future education expenses, including college and expenses for tuition in connection with enrollment or attendance at an elementary or secondary school. Earnings on contributions can accumulate tax free.    In addition to this tremendous tax break, some states, like Ohio, frequently offer a state tax benefit for contributions made to a 529 plan. Ohio’s 529 program is the College Advantage program (see College Advantage). Contributions up to $4K annually to that program are exempt from Ohio state income tax.  There is no federal or state tax on withdrawals for qualified educational expenses, including tuition and room and board expenses. STABLE accounts and 529 accounts
STABLE and 529 accounts are savings/investment vehicles that are very similar. In fact the legislation that allowed for the creation of ABLE accounts were modeled after the 529 program.  The key difference is that the beneficiary of a STABLE account must have a permanent disability established before the age of 26.  For those families who have a child with a disability, does it matter which account to use when considering education expenses?   In general, STABLE accounts offer much greater flexibility in terms of what is considered a qualified expense. So there is an advantage in keeping savings designated for your loved one with a disability in a STABLE account. As mentioned above, qualified expenses in a 529 account are limited to education expenses.   Since withdrawals for non-qualified expenses in both accounts come with a 10% penalty, it makes sense to use the account that gives the broadest definition of what constitutes a qualified expense.
If a family currently has a 529 account set up for their loved one, should they keep that account? The answer depends on what your goals are for the 529 account. If the goal is solely to save for the education needs of the child with a disability, it probably makes sense to roll over those funds into a STABLE account. Importantly, included in the tax reform bill of 2017, funds in a 529 account can be rolled over to the STABLE account up to the STABLE contribution limit in a given year, which is currently $15K plus an additional $12,140 of work earnings for those individuals who work and who do have an employer-sponsored retirement plan.  However, there may be some occasions where it might make sense to leave the money in the 529, particularly if the family would like the flexibility to roll the funds over to the 529 account of another family member. It is important to remember that STABLE accounts come with the stipulation that funds get repaid to Medicaid for services provided. So families who want their savings dollars potentially to benefit multiple family members may want to keep those funds in a 529 account.  Although the 529 and STABLE accounts are similar savings vehicles, the STABLE account provides a much more flexible way for saving without fear of penalty. The purpose of the STABLE account is to make it as easy as possible to save for future expenses for their loved one.   Although tax considerations are important, it is just as important to begin the process of developing a savings plan that will meet the goals of your loved one, now and in the future.
References:1.    Fleming, Robert B. “Should You Transfer 529 College Savings to an ABLE Account? ” Special Needs Alliance. https://www.specialneedsalliance.org/should-you-transfer-529-college-savings-to-an-able-account/2.    Internal Revenue Service,  “Tax reform affects ABLE accounts, saver’s credit, 529 rollovers”, https://www.irs.gov/newsroom/tax-reform-affects-able-accounts-savers-credit-529-rollovers3.     Lankford, Kimberly, “What to Do With a 529 College-Savings Plan When a DisabledChild Can’t Attend College”, Kiplinger https://www.kiplinger.com/article/college/T002-C001-S001-529-plan-when-disabled-child-can-t-attend-college.html. July 21, 2017. 

By Barry Jamieson