Sixty-one million adults and over 12.6 million children in the United States have some type of disability.
If you have a disabled or blind child or other family member, or are disabled or blind yourself, you should know about ABLE accounts.
These tax-advantaged accounts for the disabled are relatively new (they first became available in 2015), and they remain little known. This is a shame.
The accounts can be a real game changer for the disabled because they allow disabled individuals to save a fair amount of money without losing government benefits.
Why It’s Hard for the Disabled to Save Money
Many disabled individuals and their families rely on means-tested government benefits, such as Supplement Security Income (SSI), Social Security Disability Insurance (SSDI), food stamps (SNAP), Medicaid, and government housing vouchers. Some 8.5 million people receive disabled-worker benefits from Social Security.
The government benefits are ordinarily suspended if a disabled or blind person accumulates over $2,000 in cash or other countable assets. This can make it impossible for disabled people to save money for emergencies, to buy a house or car, or to take a vacation.
What Is an ABLE Account?
The Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act) is a federal law that authorizes the states to establish ABLE accounts.
An ABLE account is a tax-advantaged account, similar to a Section 529 qualified tuition program. Contributions are not tax-deductible for federal income tax purposes, but they are wholly or partly deductible in some states.
The money in an ABLE account grows tax-free, and withdrawals are tax-free without limit if made for “qualified disability expenses.”
Most important, contributions to ABLE accounts up to certain levels are not counted for purposes of means-tested programs for the blind and disabled.
Who Can Have an ABLE Account?
To qualify to use an ABLE account, a person must have a disabling condition that began before age 26. This includes
- any person who became eligible to receive SSI or SSDI benefits before age 26 due to blindness or disability, or
- any person of any age who files a certificate providing that he or she has a pre-age-26 mental or physical impairment that (1) is medically provable, (2) results in severe functional limitations, (3) is expected to last at least 12 months or to result in death, and (4) is confirmed by a signed qualifying disability diagnosis from a qualified physician.
A blind or disabled individual need not be receiving disability benefits to open an ABLE account.
The age 26 cutoff prevents a majority of disabled individuals from opening ABLE accounts: of the 61 million Americans who are blind or disabled, about 10 percent are eligible. Legislation is pending to increase the age limit to 46, which would allow six million more eligible individuals to open ABLE accounts.
How to Establish an ABLE Account
A disabled person is permitted to have only one ABLE account.8 The account may be established by the disabled beneficiary or by a family member, a guardian, or a person with power of attorney.
ABLE accounts may be established for both minors and adults. If the beneficiary is a minor, an adult is named as an “authorized representative” on the account.
Adult beneficiaries can manage their own ABLE accounts. But if the designated beneficiary is incapable of managing or chooses not to manage the account, a person with signature authority can control the account.
The ABLE account program is run by states, not the federal government. Currently, 42 states and the District of Columbia have active ABLE programs. An out-of-state disabled person may set up an ABLE account in any state that allows out-of-state residents to do so.
Links to the ABLE account program websites of all participating states can be found at the ABLE National Resource Center website.9 This website also allows users to compare the ABLE programs of the various states.
How about investment options? As with 529 college savings plans, states offer multiple investment options for their ABLE accounts.
How Much Can You Contribute Each Year?
The disabled individual, family, friends, and anyone else may contribute an aggregate amount not to exceed the annual gift tax exclusion. For 2021, this amount is $15,000 (the amount is adjusted for inflation each year).
Example. John and Liz want to contribute to their brother’s ABLE account. The total they may contribute along with all others is limited to $15,000 for 2021.
In addition, ABLE account beneficiaries who work may contribute the lesser of:
- their compensation, or
- an amount equal to the poverty line for a one-person household, as determined for the calendar year preceding the calendar year in which the taxable year begins.
For 2021, the poverty limit is $12,760. The Tax Cuts and Jobs Act created the compensation rule to encourage the disabled to work by permitting them to save all or part of their earnings in an ABLE account. Unfortunately, the compensation rule expires after December 31, 2025.
There is an additional benefit for a disabled person who contributes money to an ABLE account: the disabled beneficiary may be eligible to collect the saver’s tax credit of up to $1,000 ($2,000 if married). To qualify, the disabled person must have been born before January 2, 2003, must not be a full-time student, must not earn over $32,000 if single ($64,000 if married), and must not be claimed as a dependent.
The saver’s credit is non-fundable, which means that the disabled person who owes nothing in taxes (excluding refundable credits) is not going to get the credit.
Rollovers from Section 529 Plans
Families may roll over funds tax-free from a Section 529 plan to another family member’s ABLE account. Such rollovers count toward the annual ABLE account contribution limit.
The Section 529 rollovers can be extremely useful if a family member has funds remaining in a 529 plan after completing college.
Example. Art and Betty are brother and sister. Art is disabled, and Betty is not. Betty has finished college and has $15,000 left over in a 529 account established by her parents. Betty withdraws the $15,000 from her account and within 60 days deposits it into Art’s ABLE account. The transaction is tax-free.
Planning point. Total contributions from all sources for the year to the ABLE account may not exceed $15,000, excluding the beneficiary’s contribution from his or her earned income.
Lifetime Limit on Contributions
There is a lifetime limit on how much can be contributed to an ABLE account. The ABLE account limit is the same as the state’s Section 529 qualified tuition program limit. In most states this is $300,000 to $500,000.
But disabled individuals who receive SSI cash benefits may have no more than $100,000 in an ABLE account or their benefits will be suspended. Other benefits are not affected, regardless of the amount saved in the account.
Tax-Free Withdrawals from ABLE Accounts
Withdrawals from an ABLE account are tax-free so long as the money is used for “qualified disability expenses.”
Qualified disability expenses are very broadly defined. They include expenses for education, housing, transportation, employment training and support, assistive technology, personal support services (such as home health aides), health care expenses, financial management and administrative services, legal fees, and funeral expenses.
Withdrawals taken from an ABLE account for non-qualified purposes are subject to regular income tax plus a 10 percent penalty tax.
Medicaid Payback After Disabled Person Dies
When an ABLE account beneficiary dies, any state may file a “payback” claim for reimbursement of Medicaid benefits paid by the state after the ABLE account was established. This amount is paid to the state only after all qualified disability expenses are paid from the ABLE account. The payback amount is reduced by all premiums paid to a Medicaid Buy-In program under that state’s Medicaid plan.
What About Special Needs Trusts?
Since the 1960s, the families of disabled individuals have been able to establish special needs trusts to pay for expenses not covered by government benefits. As with ABLE accounts, the money in a special needs trust doesn’t count toward asset limits for benefit programs such as SSI and Medicaid.
ABLE accounts and special needs trusts are not mutually exclusive. An ABLE account can be set up in addition to a special needs trust.
One advantage ABLE accounts have over special needs trusts is that they are easier and cheaper to set up because they don’t require that a trust document be drafted. Also, ABLE accounts are owned and controlled by the disabled beneficiary, not by a person or organization serving as trustee of the special needs trust.
ABLE accounts are tax-advantaged savings accounts that allow disabled individuals and their family members to save a substantial amount of money without losing government benefits.
One ABLE account may be established for any person who became disabled or blind before age 26.
Contributions to an ABLE account are not federally tax-deductible, but the money inside the account grows tax-free.
ABLE account withdrawals are tax-free without limit if made to pay for a wide variety of expenses.
Total contributions to the ABLE account from all sources (other than the additional contribution allowed to the disabled person who works) may not exceed $15,000 and one person could contribute up to $15,000 without running afoul of the gift tax exemption.
Disabled individuals who work may contribute to their ABLE accounts an amount equal to the lesser of their compensation or the prior year’s federal poverty level for a one-person household. For 2021, you use the 2020 poverty level of $12,760.
There is a lifetime cap on contributions of $300,000 to $500,000 in most states. But disabled individuals who receive SSI benefits may have no more than $100,000 in their ABLE account.
An ABLE account may be established in a disabled person’s home state or in any other state that permits out-of-state participants.