Mike Walther, CPA/PFS, CFP, CFA, founder of Oak Wealth Advisors LLC, who assists families in implementing comprehensive plans for their loved ones with special needs, says that while 529 plans have wonderful income tax advantages, they can be disastrous if the child doesn’t continue her education beyond high school and wants to receive public assistance after she turns 18. “The 529 Plans count as assets held by the child and will most likely disqualify him or her from receiving public benefits,” Walther says in his post “7 Financial Planning Mistakes Special Needs Families Should Avoid”.
The best course of action, then, is to transfer the 529 funds to another family member that plans to continue his education.
In the situation where the beneficiary with special needs can’t attend college and there is no other family member to whom the funds can be transferred, “the account owner would need to process a non-qualified withdrawal to access the money saved, and the earnings would still be subject to any applicable state and federal taxes,” says Dan Reyes, head of education savings for New York’s 529 College Savings Program Direct Plan. “For non-qualified withdrawals, a 10-percent penalty typically applies to the earnings (amount included as income), but in the case of the beneficiary having special needs and being unable to attend college, the 10-percent penalty is waived.”
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