ABLE Accounts: Savings Accounts for Individuals with Disabilities
By Joe Messinger, CFP®
March 27, 2018
In 2014, a type of tax-advantaged savings account for individuals with disabilities and their families was created with the passage of the Stephen Beck Jr., Achieving a Better Life (ABLE) Experience Act. Families who have children with disabilities face expensive challenges. Many depend on public benefits like Medicaid, Social Security, or the Supplemental Nutrition Assistance Program (SNAP) in order to survive. To remain eligible for these benefits, families must remain poor. However, their financial needs because of extra housing, transportation, assistance, technology, and health care services exceed the public benefits available so ABLE accounts were proposed as a solution.
Using an ABLE account, allows a family to supplement not supplant their public benefits eligibility.
How does a 529 ABLE account work?
529 ABLE accounts (529A) can be used to pay for “qualified disability expenses” which are a direct result of living with a disability, and like 529 college savings plans they earn interest tax free so long as used to pay for qualified expenses. These may include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services and other expenses which help improve health, independence, and/or quality of life.
Thirty different ABLE account programs exist in the United States and they are administered by the states. You are not limited to your home states ABLE account. You may choose to invest your funds in any states plan and receive the same federal tax advantages. You can compare the various state plans here.
To be eligible, the onset of the disability must have occurred before the age of 26, and the individual must be receiving Supplemental Security Income or Social Security Disability Insurance. (If not already receiving these benefits, certain circumstances will still allow you to open an ABLE account.)
Just like 529 college savings plans, ABLE accounts are subject to gift tax limits. For 2018, each individual is limited to $15,000 in gift contribution to an ABLE account in one annual period. (If more is contributed, it is possible to roll-over that excess amount into the subsequent years–up to 5 years.)
Changes to ABLE accounts
With the passage of the new Tax Cuts and Jobs Act effective in 2018, account owners have some more flexibility. Families who have 529 college savings plans can transfer up to $15,000 per year from their 529 college savings plan into their ABLE 529 account so long as the beneficiary is the same or in the same family (529 plans have also been expanded to pay for K-12 education as well.)
ABLE beneficiaries who are able to earn income can use that income to make contributions to their ABLE plan in excess of the $15,000 per year. Their maximum contribution cannot exceed the federal poverty guidelines.
The ability to transfer funds will end in 2025 unless the Congress extends the law. These changes provide families with some flexibility in their investments.