Saving For College Expenses For Your Child With Special Needs

Friday, June 20th, 2014

Hi everyone and welcome back to our blog this week!

Here at M&L, we are so excited to be only two days away from the official start of summer! All over the country teachers, administration, and students are officially wrapping up for the year – or are already enjoying the first few days of freedom. We are pretty confident that parents everywhere are simultaneously breathing a sigh of relief to have weathered another school year.

In light of this, the timing of this week’s topic may be a little strange – today we will be discussing the best ways to plan and save for the college tuition and expenses of your children, specifically your children with special needs. Although you may simply wish to enjoy the end of another successful school term for the moment, we feel that it is never too early to look ahead – especially when it comes to your finances.

There are a number of options available to parents who wish to begin saving for the college expenses of their children; among the most popular are the relatively new 529 Savings Plans, the Coverdell Education Savings Account, and Custodial Accounts.  In terms of savings accounts/plans which are beneficial to individuals with disabilities, we have included a brief discussion of the Individual Development Account (IDA) and the Plans for Achieving Self Support (PASS). Please join us as we discuss these different options, as well as provide a brief summary of the yet-to-be-passed ABLE Act.

The 529 Savings Plan – What is it?

If you have begun the process of financially planning for the future college expenses of your child, you have probably heard of the 529 plan. According to the U.S. Securities and Exchange Commission (SEC), the 529 is a “tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.[i]

Quite simply, the 529 is an excellent way to save for college while receiving tax-break benefits; the plan can take two forms: prepaid tuition plans, and college saving plans. Every state offers at least one option. The prepaid tuition plan is exactly what it sounds like; it lets you prepay tuition at current tuition rates. The college savings plan lets you “invest money in a tax-differed account that will later be used to pay for education at future tuition rates.” As you can imagine, both of these options have their advantages and their disadvantages; as the prepaid option is more restrictive, the savings plan is the favoured of most financial professionals.

In a lot of cases, parents go ahead and set up 529 plans for their children including their children with special needs. The 529 savings plans may only be used for accredited institution tuition, fees, books, as well as room and board.  If a young adult with disabilities goes to an accredited institution, the 529 funds may be used. However, these funds may not be used for post-secondary programs for individuals with disabilities. The 529 plans are owned by the parent and their child is the beneficiary of the plan. If a 529 plan has been set up for a child with special needs who will not use these funds, the parents can the beneficiary to a sibling who will be going to an accredited institution. In addition, 529 plans are not considered a resource for SSI since the parents own the plans and can change the beneficiary at any time. For individuals with disabilities, another option is possible the ABLE Act. Please read on to the ABLE Act section of this blog; although it is not yet passed, it is designed to amend the 529 plan so that it becomes beneficial for individuals with disabilities.

If you would like to learn more about the different 529 options, please visit the Securities Exchange Commission website.

Coverdell Education Savings Account

A Coverdell Education Savings Account (also known as an ESA) is a tax-deferred trust account that helps families save for and fund education expenses for beneficiaries.

The primary difference between an ESA and a 529 is that the ESA’s benefits have been extended to include pre-college education expenses, i.e. elementary and high school expenses. There are income restrictions which limit who can establish this type of account.

There are a number of things to consider when deciding whether or not to use the ESA as an education-savings platform. Here are a few of these considerations:

1.) You can only contribute to the ESA until the child (beneficiary) turns 18.
2.) After the child turns 30 years of age, any unused funds in the ESA must be turned over to the beneficiary, not re-absorbed into your own finances.
3.) As well, the total maximum contribution per year for any single beneficiary is $2000. Any single beneficiary can have more than one ESA; however the total yearly contribution limit remains capped at $2000 regardless of how many accounts there are.

Coverdell ESA’s can have beneficiaries with special needs; in the case of a beneficiary with special needs, unused funds can remain in the account after the beneficiary turns 30. To learn more about ESA’s, please visit the IRS website.

Custodial Accounts

Custodial accounts are savings accounts set up in your child’s name. The creator (or custodian) of the account retains control of the account and the funds within until the beneficiary reaches legal adulthood. As with all savings options, custodial accounts have their good and bad points; most financial experts agree, however, that the creation of the 529 savings plans have rendered custodial accounts much less desirable. Here are a few characteristics that you should consider before deciding to use them as a savings strategy:

1.) It is very easy to set up
2.) Has few restrictions
3.) Is taxed heavily
4.) The child/beneficiary has complete control of the account once he or she reaches adulthood
5.) Cannot transfer to a different beneficiary once established.

Please Note: While the ESA and the 529 plans have their pros and cons, the custodial account isn’t a good option for individuals with special needs for one simple reason: the funds in the account are considered an asset. Therefore, if you have a custodial account for your child with special needs, it may jeopardize his or her eligibility for important state and benefits resources. (Remember: for your child to quality for these benefits, he or she must have $2000 or less in assets/resources.)

 

If you are still considering using the custodial account as a savings option and would like more information, please click here.

The ABLE Act

Here at M&L, we strive to provide our clients with the necessary information and resources required for them to make informed decisions as to how to plan for the future.

As each family with special needs has its own unique set of circumstances and financial resources, it is impossible to say with any certainty what the “best option” is, without knowing these unique circumstances. Each and every option has its own set of pros and cons, in the same way that each family has its own set of priorities.

Having said that, M&L does have a few recommendations up our sleeve; to begin, we will point you to a blog we published a few weeks ago on the ABLE (Achieving a Better Life Experience) Act. Despite the fact that this piece of legislation has not yet been passed, here are M&L we point to it as the best possible option for those looking to save for the college expenses of their child/ren with special needs.

Here is a short summary of the Act: “The ABLE act, if passed, would amend Section 529 to allow for the creation of tax free savings accounts for persons with disabilities. This account – which would closely resemble the above 529 college savings accounts – would help “ease the financial strains for individuals by making tax-free savings accounts available to cover qualified expenses such as education, housing, and transportation.”

To read about this incredible act in full, as well as access information on how to advocate getting it passed, please click here.

Individual Development Account and the Plans for Achieving Self Support

As the ABLE act is not yet passed, we have another two savings options for you that can help individuals with disabilities save for their educational futures: the IDA and the PASS plans.

The Individual Development Account (IDA) is “a savings account designed to help low-income individuals save for specified purposes. The individual makes deposits from his or her earnings, and these are matched by a combination of government and private-sector funds.” The IDA is one way for an individual with disabilities to begin a savings account for post-secondary education without jeopardizing their eligibility for benefits; and, if done correctly, the earnings contributed to this type of account are deducted from wages in determining countable income. Please note: this type of account can be complicated to establish. M&L strongly advises that any individual considering this type of savings option consult with a professional who is experienced with special needs financial planning before taking any steps.

Plans For Achieving Self Support (PASS) is a “special Social Security Work incentive that allows individuals to set aside income or resources needed to achieve a stated occupational goal.” These funds are not counted when determining SSI eligibility determination, or when calculating countable income to determine payment amount. As such, these type of plans can be a great way to save for a future educational goal or educational expense. Once again, M&L cautions that individuals should consult with a trained professional before beginning any savings program to ensure benefits eligibility is not compromised.

For more information about IDA or PASS, please click here.

Would You Like More Information?

The following websites are excellent resources for learning about college savings plans for individual with special needs:

Saving for Post-Secondary Education: Strategies for Individuals with Disabilities

Investopedia – What options do I have to save for my child’s education?

UW – College Funding for Students with Disabilities

If you would like more specific information on saving for your child with special needs’ college tuition or expenses, or have questions that are relevant to your family’s financial situation, please do not hesitate to let us know! We offer many financial planning/saving services, including consultations, insurance analysis, and our very popular Comprehensive Special Needs Financial Life Plan. We also offer life planning advice for individuals with disabilities, including transitioning services, housing/independent living supports and services, and employment/benefits counselling. For more information on these services, or any of the services that we offer, please visit our website’s Services Page, or contact us! We love hearing from you.

Thanks so much for stopping by today. Please join us next week for a discussion of the most common mistakes that people make when creating financial plans for the future.



[i] https://www.sec.gov/investor/pubs/intro529.htm

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