Three After-Tax Savings Programs With Tax Advantages

Under the current tax system, most savings programs, such as IRAs, are incentivized by tax deductions for contributions. However, there are three important savings vehicles, one of which is new, that do not hinge on deductions for contributions; they rely on tax breaks for withdrawals and offer other benefits.

ABLE Accounts

The cost of raising a disabled child to the age of 18 can reach $1 million (https://www.mint.com/blog/planning/the-cost-of-raising-a-special-needs-child-0713) and the needs of a disabled person do not end at the age of majority. The Achieving a Better Life Experience (ABLE) Act (H.R. 647, which was part of Division B of H.R. 5771) was signed into law on Dec. 19, 2014, as part of the Tax Increase Prevention Act of 2014 (the “extender bill”). It creates a new type of savings plan for disabled individuals without causing them to lose eligibility for Medicaid and other government assistance programs. Contributions to an ABLE account are not tax-deductible, but earnings grow on a tax-deferred basis, and withdrawals for qualified expenses are tax-free (Code Sec. 529A).