529 Plan or ABLE Plan - Which is Right for You?

March 07, 2023
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When it comes to saving for future expenses, such as education or disability-related costs, there are various options available, including 529 plans and ABLE plans. While these plans have similarities, there are some key differences that individuals should consider before making a decision.

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to help individuals and families save for qualified education expenses. These expenses can include tuition fees, books, and room and board for eligible post-secondary education institutions. 529 plans are sponsored by states or educational institutions and are available to U.S. citizens and residents. The funds in 529 plans grow tax-free, and withdrawals used for qualified education expenses are also tax-free.

What is an ABLE plan?

An ABLE (Achieving a Better Life Experience) plan is a savings account designed for individuals with disabilities and their families to save for disability-related expenses. These expenses can include education, housing, transportation, healthcare, and other expenses related to the individual's disability. ABLE plans are also sponsored by states and are available to individuals with significant disabilities that onset before the age of 26. Contributions to ABLE accounts are made after-tax, and the funds grow tax-free. Withdrawals from ABLE accounts used for qualified disability-related expenses are also tax-free.

Differences between 529 plans and ABLE plans

The main differences between 529 plans and ABLE plans are the purpose of the accounts and the types of expenses they cover. While 529 plans are designed for education-related expenses, ABLE plans are designed for disability-related expenses. Additionally, the eligibility criteria for ABLE accounts are limited to individuals with significant disabilities that onset before the age of 26, while 529 plans are available to all individuals, regardless of disability status.

Another key difference is the contribution limit. 529 plans generally have higher contribution limits than ABLE plans, which can vary by state. For example, in 2021, the annual contribution limit for 529 plans ranges from $235,000 to $529,000, depending on the state, while the annual contribution limit for ABLE accounts is $15,000.

Finally, the investment options for 529 plans and ABLE plans differ. 529 plans typically offer a range of investment options, such as mutual funds, exchange-traded funds, and age-based portfolios, while ABLE accounts may offer limited investment options.

Which plan is right for you?

Deciding between a 529 plan and an ABLE plan depends on your financial goals and needs. If you are saving for education-related expenses, a 529 plan may be a better option, as it offers higher contribution limits and a range of investment options. However, if you or a family member has a disability and you are saving for disability-related expenses, an ABLE plan may be the better option, as it offers tax-free growth and withdrawals for qualified disability-related expenses.

It's worth noting that individuals can have both a 529 plan and an ABLE account, as long as they do not exceed the contribution limits for each plan. Additionally, some states offer tax incentives for contributions to 529 plans or ABLE accounts, so it's important to research the rules and regulations in your state before making a decision.

In conclusion, both 529 plans and ABLE plans offer tax-advantaged savings options for future expenses, but the key differences between the two plans make them better suited for different purposes. Understanding these differences can help you make an informed decision about which plan is right for you and your family.