Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / The 529 ABLE Account Strategy for Special Needs
Transcript
- Lucas: If your child has a disability and you've been saving in a 529 plan, you might be accidentally setting them up to lose Medicaid or SSI benefits. That's the kind of thing nobody tells you at the college savings seminar. Luna: Wait, the 529 counts as an asset for means-tested benefits? I thought it was parent-owned in most cases. Lucas: That's partially true. If the parent owns the 529, it's assessed at a maximum of 5.64 percent on the federal financial aid form. But for Medicaid and SSI, the rules are different. And if the child owns the 529 — which happens sometimes with custodial accounts — that asset can disqualify them entirely. Luna: So what's the alternative for a family in that situation? Lucas: The ABLE account. It stands for Achieving a Better Life Experience. It's a tax-advantaged savings account for people with disabilities, and the key difference is that the first $100,000 in an ABLE account is completely disregarded for SSI purposes. Medicaid doesn't count it at all as long as it stays under a certain state threshold. Luna: Right, I've heard of these. But doesn't the law allow you to roll over money from a 529 into an ABLE account? Lucas: Exactly. The SECURE 2.0 Act made that permanent. You can roll over up to $16,000 per year from a 529 to an ABLE account, as of 2026. And that rollover counts toward the annual ABLE contribution limit, which for 2026 is $18,000 per beneficiary. Luna: So if you have a 529 with $50,000 for a child who later becomes disabled, you can slowly move that money into an ABLE account at $16,000 a year without tax consequences. Lucas: Correct. And once it's in the ABLE account, it's not a countable asset for federal benefits. That's a game-changer for families who saved early in a 529 but later learned their child qualifies for disability programs. Luna: Is there a catch? I feel like there's always a catch. Lucas: The biggest catch is that the beneficiary must have a disability that began before age 26. And the account can only be used for qualified disability expenses — things like education, housing, transportation, health care, assistive technology, and employment support. So it's not as flexible as a 529, but for the right family, it's a perfect fit. Luna: What about the state tax deduction? If I contribute to a 529 in my state, I get a deduction. Does the rollover preserve that? Lucas: Great question. Most states treat the rollover as a non-deductible contribution. You already got the deduction when you put the money into the 529. But some states, like Ohio, allow a state tax deduction for ABLE contributions up to a certain limit. Ohio, for example, lets you deduct up to $4,000 per year for contributions to the STABLE Account, which is their ABLE program. Luna: So you could double-dip? Contribute fresh money to the ABLE account, get the state deduction, and also roll over from the 529? Lucas: In theory, yes. The total contribution limit is still $18,000 per year, but that limit applies to all contributions combined. So you could contribute $2,000 in fresh money and roll over $16,000 from the 529. The fresh money might be deductible depending on the state. Luna: That's actually pretty generous. But who monitors whether the spending is for qualified disability expenses? Lucas: You do. It's self-certified. The IRS requires you to keep records, but there's no pre-approval process. If you use the money for non-qualified expenses, the earnings portion is subject to income tax and a 10 percent penalty — similar to a 529. Luna: Honestly, if we've helped you think through whether an ABLE account makes sense for your family, that's really what we're here for. If today's episode was worth a coffee to you, you can find our support link at buy me a coffee dot com slash fexingo. No pressure, it just helps us keep these conversations ad-free. Lucas: Absolutely. And speaking of keeping it practical — let's talk about how to actually open one of these accounts. Lucas: Every state has its own ABLE program, but you're not limited to your state's plan. You can shop around. Some plans have lower fees or better investment options. For example, the Ohio STABLE Account has expense ratios around 0.33 percent, while New York's ABLE plan charges about 0.39 percent. Luna: And does the beneficiary have to live in that state? Lucas: No. Most ABLE programs are open to residents of any state. The only exception is if your state offers a state tax deduction for contributions to its own plan — then you'd want to use that plan to get the deduction. Luna: Let's walk through a real scenario. A family in Texas with a 529 worth $30,000 and a child who qualifies for SSI benefits. What should they do? Lucas: First, confirm the disability began before age 26. If yes, they can open an ABLE account in any state. Texas doesn't have an income tax, so no deduction to worry about. I'd recommend Ohio or Florida — both have low fees and no residency requirement. Luna: Then they roll over $16,000 from the 529 into the ABLE account this year, and another $16,000 next year. The remaining $2,000 can stay in the 529 or be withdrawn penalty-free if it's used for qualified education expenses. Lucas: Exactly. And the key benefit: that $30,000 in the ABLE account doesn't count as a resource for SSI, as long as the total doesn't exceed $100,000. The child keeps their SSI cash benefits and Medicaid. Without the ABLE account, that $30,000 in a custodial 529 could have cost them eligibility. Luna: What about housing expenses? I've heard ABLE accounts have a weird rule for housing. Lucas: You're right to bring that up. If you use ABLE funds for housing, that amount is considered in-kind support and maintenance for SSI purposes. It can reduce the SSI benefit by up to one-third. So you want to be strategic — use the ABLE account for education, health care, and transportation, and use other funds for housing. Luna: So it's not a complete solution, but it's a much better tool than a 529 alone. Lucas: Right. And there's another layer: if you have a special needs trust, you can also fund an ABLE account from that trust. The trust can contribute to the ABLE account without losing the trust's tax benefits. Luna: I imagine a lot of families don't even know these accounts exist. The ABLE Act was passed in 2014, but adoption has been slow. Lucas: As of 2025, the total assets in ABLE accounts nationwide were about $1.8 billion, compared to over $500 billion in 529s. So there's a huge awareness gap. But for families with special needs, the ABLE account can be a lifesaver. Luna: One thing we haven't mentioned: the beneficiary can have only one ABLE account. So if you open one in Ohio, you can't also open one in Florida for the same person. Lucas: That's correct. And contributions are limited to $18,000 a year, but that limit is per beneficiary, not per account. So if you're a grandparent who wants to contribute, you can give directly to the beneficiary's ABLE account, and it won't exceed the annual gift tax exclusion. Luna: So grandparents can contribute up to $18,000 without filing a gift tax return, and that money is protected for benefits. Lucas: Exactly. And there's a special provision: if the beneficiary works, they can contribute additional earned income up to either the federal poverty level or $14,000, whichever is higher. That's on top of the $18,000 limit. So a working beneficiary with a disability can save more. Luna: I think the takeaway is clear: if you're saving for a child with a disability, don't just default to a 529. At least consider pairing it with an ABLE account, or rolling the 529 into an ABLE account if the child already qualifies. Lucas: And do it before the 529 balance grows too large. Once it's over $100,000, the SSI benefit suspension kicks in. Better to move the money early. Luna: Good advice. Next episode, we'll look at how 529 plans interact with scholarships and what happens to the money if your child gets a full ride. Lucas: That's a common question. We'll break down the penalty-free withdrawal rules and the scholarship exception.