How Can I Invest for a Child with Special Needs?

Dear Carrie,

I have a special needs child. He just turned 5 and has been diagnosed with some severe learning disabilities. I’m a single mom and don't have much money to invest but would like to do something for his future. I've been told this could affect some of his government benefits. I have life insurance and a will, but how can I put money aside for him?

—A Reader

Dear Reader,

Planning for the financial future for any child is no easy task. Planning for a child with special needs, especially if you have limited resources, is even more challenging. You've made a great start by having life insurance and a will. Putting money aside for the present—and the future—is the next step.

One of the biggest challenges for people with disabilities and their families has been how to save and invest to cover disability-related expenses without losing public benefits. You may have heard of a special needs trust, which is one way to set aside and protect assets for your son, but it can be somewhat complex and costly to set up. There is, however, a simpler, lower-cost solution available—a 529 ABLE account.

ABLE accounts, established in 2014, allow people to save and invest without being subject to strict asset limits ($2,000 for an individual) to receive federal means-tested benefits such as Supplemental Social Security Income (SSI). Plus, they're easy to open, flexible and provide certain tax advantages. Let's talk about how an ABLE account works and the potential benefits.

The basics

Similar to 529 college savings plans, ABLE accounts are offered at the state level but you don't have to enroll in your own state's program. You can open an ABLE account in any state that accepts outside residents. Any individual who has a qualifying disability before age 26 is eligible for an ABLE account.

The account is opened in the name of and for the benefit of the person with the disability and money in the account must be used specifically for the beneficiary. The maximum annual contribution is currently $16,000.

Lifetime contribution limits vary by state and can be as high as $500,000, however a lower limit of $100,000 generally applies when determining eligibility for SSI benefits. What's more, ABLE assets don't affect eligibility for Medicaid benefits, although money that isn't used during your son's lifetime may have to be paid back to Medicaid for disability-related expenses.

Added advantages

On top of the ability to save without jeopardizing government benefits, an ABLE account is appealing for a lot of other reasons, including:

• Account opening minimums are low—Minimums required to open an account vary by state, but some are as low as $25. That makes it easy to get started. Deciding how much you can afford to contribute each month and then setting up an automatic contribution can be a convenient and smart move.
• Family and friends can contribute—If there are grandparents, other family members or friends who want to help, an ABLE account provides an easy way for them to contribute. Just remember that the annual contribution limit I mentioned above includes contributions from all sources.
• The money can be used for a wide variety of expenses—Here's one of the real perks. While the money must be used to pay for "qualified" disability expenses, the definition is very broad. Basically, it includes almost anything to maintain or improve the quality of life of the beneficiary—education, housing, transportation, assistive technology, employment training, financial management, healthcare—to name just some. Plus the funds can be used over the course of the beneficiary's lifetime.
• You can grow the money by investing—Here's another plus. Most plans offer investment as well as savings options, so you can prepare for the future as well as pay for the present. Depending on your son's needs and timeline, you could decide to invest a certain amount in a conservative, moderate or aggressive portfolio. As with any investment plan, be sure to check things like investment choices, fees and minimums, and consider your risk preferences and investment time horizon before you invest.
• You'll get some tax breaks—Like 529 college savings plans, you don't get an upfront federal tax deduction for contributions to an ABLE account, but earnings grow tax-free and withdrawals for qualified expenses are also income tax free. Some states offer additional tax breaks for residents who enroll in their home state's plan. You can check with the ABLE Resource Center to see what your state offers and compare it with other states.

An ABLE account can be a good start

While an ABLE account can let you set aside money for your son's future at the same time that you build up some reserves for current expenses, it's not the only solution. A special needs trust is also an option if you need a more customized approach. As you're planning, it's also important to factor in other state or local benefits your child is eligible for as well as how an ABLE account works together with your overall estate and insurance needs.

A special needs advisor can help

I understand all this can seem overwhelming, so you might want to check in with a special needs advisor. It's possible that the HR department of the company you work for may offer assistance with special needs planning. There are also attorneys and financial planners who specialize in helping families and caregivers with special needs individuals, including:

• Special Needs Alliance (specialneedsalliance.org)
• National Academy of Elder Law Attorneys (naela.org)

A special needs advisor can help you review titling of investment accounts and life insurance, evaluate financial resources and help you plan ahead. While the upfront costs may seem steep, working with the right professionals can help save you time, money, headaches—and heartaches—down the road.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.