In the week leading up to Christmas 2014, the U.S. Congress passed the Achieving a Better Life Experience Act, which created a 529A account to provide tax advantaged benefits for disabled individuals. It is a significant change to the financial planning landscape for special needs beneficiaries, with the potential for helping many families with disabled members.

The 529A is modeled after the Section 529 College Savings Plan, which is widely used for college planning. The 529A account is meant to allow tax advantaged accumulations and distributions for a wide range of expenses for the disabled beneficiary. Here are some specifics about the plans and how they differ from traditional 529s:

The 529A account uses the Social Security definition of disability. In addition it can benefit only people who have been diagnosed with a qualifying disability before age 26.

Like the 529 college plans, the 529A ones will be set up on the state level. Presumably, the same state agencies that oversee the 529 college plans will be responsible for the 529A, although that may differ from state to state.

There can be only one 529A account per beneficiary, normally in his or her state of residence. That is different from the 529 college plans, for which there is no limitation on which state plan is used, and where the distributions are made.

Spending for a beneficiary can occur only in his or her state of residence. This will allow simplified compliance verification for federal and state agencies.

Contributions in the 529A are with after tax money and are limited to $14,000 a year (in 2015) for each beneficiary from all sources. Individual states may choose to provide additional tax benefits.

Investment growth in the 529A is tax free.

Distributions are tax free so long as they are used for qualified expenses. Otherwise, earnings on distributions are taxed at ordinary income rates with a 10% penalty added. Qualified expenses include housing, transportation, health and wellness, and education.

Having a 529A does not disqualify the disabled individual from federal and state aid, such as Supplemental Security Income or Medicaid, so long as the amount held in the 529A does not exceed $100,000. Effectively that caps the 529A account to $100,000.

Should the 529A account balance exceed $100,000, Supplemental Security Income would be suspended, but not terminated. Once the balance falls below $100,000, benefits would be resumed.

The limitations on contributions and on balance levels suggest that the 529A could be used as a hybrid between an investment account and a checking account.

Advantages

The 529A comes with built-in benefits such as low costs (hopefully), tax advantages and the ability to have up to $100,000 in assets without jeopardizing access to public support programs.

The new plan should be attractive to many middle-class families. Similar to the intent of the 529 plan for college bound students, the 529A allows families to set aside money for their disabled loved one, and use it as needed, while limiting the impact of unforeseen expenses on their lifestyle.

Drawbacks

However, the 529A has restrictions for annual contributions and maximum balance that may make an account delicate to manage. It is not a vehicle for disabled people to accumulate more than $100,000. In fact due to the relatively low balance limit, the vagaries of market fluctuations that it may be subjected to and the inevitable withdrawals that will occur, many people will want, if they can afford it, to supplement a 529A with a Special Needs Trust.

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The 529A is not a perfect vehicle. However, it is a great new tool to help disabled people. It will allow more families to plan support for their disabled family members with an easy-to-use framework that should be relatively low cost and may provide additional funding in the form of tax free earnings. In addition, 529A accounts supplement rather than replace Special Needs Trusts by filling a gap for the period before Special Needs Trusts are funded.

The post 529A Savings Plans Could Help People With Disabilities appeared first on NerdWallet News.