ABLE accounts are a relatively new type of tax-advantaged savings account. They were designed to help individuals with disabilities and their families.
If this situation applies to you, this type of account is worth your consideration.
- How they work
- The tax benefits
- Who qualifies
- Eligible expenses
- How and where to get an ABLE account
When ABLE Accounts Were First Available
ABLE accounts were created in 2014 by the Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act.
These accounts were created under Internal Revenue Code Section 529. Before ABLE accounts were approved, this section dealt with education savings plans.
However, the new ABLE accounts make it possible to save for disability-related expenses.
In the past:
Saving for disability-related expenses often meant a person would lose federal and state benefits.
Once you exceed the savings amount limits cited for benefit programs such as Medicaid and Social Security Disability Insurance (SSDI), you’d no longer have access to those benefits.
ABLE accounts give families of children with disabilities the ability to save up to $100,000 in an ABLE account without terminating federal benefits like Supplemental Security Income (SSI) benefits.
In addition, ABLE accounts do not typically impact Medicaid eligibility.
How They Work
If a person qualifies for an ABLE account, an account can be opened for the benefit of the disabled individual.
The disabled individual is called the beneficiary of the account.
The account is opened through an individual state’s ABLE account program. Technically, federal law allows you to open an ABLE account in any state.
You can only join a state’s program if that state’s ABLE account program allows it.
For instance, Tennessee’s ABLE account program accepts people nationwide. On the other hand, Florida’s program only accepts in-state residents.
Once funds are saved in the ABLE account, the beneficiary can withdraw funds. Alternatively, a person with signature authority may withdraw funds.
Either way, distributions must be used for qualified disability expenses for the beneficiary.
If they aren’t, investment earnings will be taxed and a 10% tax penalty applies.
Tax Benefits of ABLE Accounts
Here's the best part:
Just like with 529 education savings accounts, ABLE accounts allow the balance in your account to grow tax-free.
No one gets a federal tax deduction for putting money in an ABLE account.
Don't be discouraged:
Individual states may offer state tax deductions or tax credits if they wish.
The earnings on your investments will be tax-free as long as you use the money for qualified disability expenses.
If you withdraw money for a non-qualifying expense, the beneficiary will have to pay taxes on the part of the withdrawal that represents investment earnings. The beneficiary will also have to pay a 10% tax penalty.
Who Qualifies for ABLE Accounts
To qualify for an ABLE account, an individual must have had an onset of their disability before they turned 26.
If they became disabled at age 26 or later, they do not qualify.
However, if the disabled person is currently over age 26 but became disabled before their 26th birthday, they still qualify for an ABLE account.
If a person meets the age test, a person automatically qualifies if they also receive benefits under SSI or SSDI.
That said, if a person isn’t currently receiving SSI or SSDI benefits they can still qualify.
The person must meet Social Security’s definition and criteria when it comes to significant functional limitations. In addition, they must get a letter certifying these conditions by a physician.
ABLE Account Limitations
Anyone can contribute to the accounts.
In 2018, an ABLE account can receive a maximum of $15,000 in contributions per year. This amount may increase in future years with inflation.
In 2017, the amount was only $14,000.
Since a beneficiary may only have one ABLE account, this limit applies to total contributions to the account no matter who makes them.
While the yearly contribution limit is the same in all states, the maximum balance of an ABLE account is governed by each individual state.
Even with maximum limits varying by state, the SSI individual resource limit exemption only applies to the first $100,000 in an ABLE account.
Unfortunately, once the balance of an ABLE account exceeds $100,000, the SSI benefit is suspended until the account falls below the $100,000 threshold.
There is no account balance limitation to receive Medicaid benefits.
However, once the beneficiary of the account dies, the state may claim the remaining funds in the ABLE account up to the amount the state spent on the beneficiary through their Medicaid program.
Allowable ABLE Expenses
In order to maintain the tax benefits and avoid the tax penalty, distributions must be for qualified disability expenses.
The Social Security Administration says qualified expenses are not limited to but include the following:
- Education expenses
- Housing expenses
- Transportation expenses
- Employment training expenses
- Employment support expenses
- Assistive technology and related expenses
- Personal support services expenses
- Health expenses
- Prevention expenses
- Wellness expenses
- Financial management and administrative expenses
- Legal fees
- Expenses for ABLE account oversight and monitoring
- Funeral expenses
- Burial expenses
- Basic living expenses
The Social Security Administration further defines housing expenses as:
- Mortgage expenses
- Real property taxes
- Rent expenses
- Heating fuel expenses
- Gas expenses
- Electricity expenses
- Water expenses
- Sewer expenses
- Garbage removal expenses
Who Offers ABLE Accounts?
Each individual state has the ability to create an ABLE account program.
They may also determine the rules for that program as long as they fall within the allowed framework.
Currently, the following states offer ABLE account programs:
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- Rhode Island
- South Carolina
- West Virginia
ABLE accounts were just created in 2014.
In order for a state to start offering ABLE accounts, the state needs to pass legislation governing their state’s program.
For that reason, the above list may change as more states opt to provide ABLE account programs.
Finding the Right ABLE Account
Here are a few factors you may want to consider when deciding which state’s ABLE account program you should choose:
- Can out-of-state residents enroll in the program?
- Are state tax credits or deductions offered for in-state residents?
- Who administers the program?
- Are there minimum contribution requirements?
- What are the possible fees you could be charged?
- Are there restrictions or fees on disbursements?
- Does the program offer a debit card to make purchases?
- What investment options are available?
- What are the fees on the investment options?
Additionally, make sure you investigate any program you’re considering to see if there are any quirks you need to be aware of.
How to Best Use An ABLE Account
Living with a disability can be challenging, especially without the ability to save money for future expenses without losing vital government benefits.
The main purpose of ABLE accounts is to allow people with disabilities to have savings in excess of the $2,000 limit imposed for most government benefits.
Individuals and families can contribute to ABLE accounts so money is available when it is needed for disability expenses.
The money can grow
To use the main tax benefit of ABLE accounts, you’ll need to invest the balance of an ABLE account and let it grow over time.
The reason why you need to do this to take advantage of the tax benefit is only investment earnings are tax-free. If you simply deposit money in an ABLE account and use it for expenses right away, you won’t gain any real tax benefit.
Paying for qualified expenses
While the tax benefit is nice, it shouldn’t be your main concern with an ABLE account.
View the tax benefit as the cherry on top of a sundae. It’s nice, but it isn’t the main reason for ordering a sundae.
Instead, focus on using the ABLE account to save for future qualified disability expenses that you know will pop up.
This way, you won’t be forced to go into debt or rely on someone else to pay for large expenses that exceed the $2,000 savings limit.
For instance, you may need a minivan with special accommodations to be able to drive safely.
Let’s say the minivan costs $50,000 after the necessary modifications have been made.
Prior to the ABLE account program, you couldn’t save money in advance to pay for a minivan in cash without exceeding the $2,000 in savings allowed by many federal assistance programs.
Instead, you’d be forced to take out a loan and make monthly payments on the minivan in order to keep your benefits.
Now you could save that $50,000 in advance in an ABLE account.
Then, when you need to purchase the specialty minivan, you could pay cash and avoid taking out a car loan.
ABLE Accounts Are a Great Resource
ABLE accounts are a great resource for those with disabilities that qualify for them.
Now, you can save money, up to $100,000, without worrying about losing access to vital benefits like SSI, SSDI and Medicaid.
Make sure you research which state’s ABLE account program provides the best overall benefits for you before you open one.
In general, consider your own state’s program first.
Then compare your state’s program to other programs to find the best program for you.
And, remember, you should still maintain a regular savings account and other tax-advantaged accounts to round out your financial setup.