Living with a disability is often expensive, and it can also preclude individuals from working full-time or in certain industries. Some individuals may find themselves at a financial disadvantage. That’s particularly true when they have to cover living costs while keeping their paychecks small enough to keep government benefits.
But that’s why ABLE accounts for disabled individuals exist: to provide financial stability in tough situations. Families of differently-abled people (disabled before the age of 26) can setup tax advantaged ABLE Accounts for qualified expenses.
So, What are ABLE Accounts?
ABLE disability accounts are tax-advantaged savings accounts designed especially to help disabled individuals and families build a safety net.
The way they work is simple.
ABLE accounts designate the account beneficiary (individual who receives money) as the account owner, even if another person has guardianship or power of attorney. Anyone – the beneficiary, family, friends, employers, trusts, etc. – can contribute post-tax dollars to the account. The money can be kept in cash or invested to grow with time.
Then, the account owner can withdraw funds tax-free (including investment growth) to cover any “qualified disability expenses” as needed. Eligible expenses may include housing, healthcare, transportation, education, or essentials like food and clothes.
Most importantly, ABLE accounts allow individuals with disabilities to save more money without losing eligibility for federal benefits like Medicaid or SSI.
The ABLE Act
Many households with disabled individuals rely on public benefits for income, shelter, healthcare, and food assistance. Unfortunately, these benefits often set (arguably absurdly) low “means tests” limits. Means tests restrict funding to households based on income caps or keeping less than $2,000 in liquid resources, such as cash savings.
In other words, to stay eligible for assistance, you have to stay poor. If you get a raise, work longer hours, or stash a little extra in savings, your benefits disappear.
The Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act of 2014 bridges some of these gaps.
The bill acknowledged that living with a disability comes with financial needs that can’t be met under the means system. These include the costs of raising a disabled child, finding accessible housing and transportation, and affording crucial healthcare services.
To mitigate these problems, the ABLE Act allows disabled individuals and families to open state-operated savings accounts. Families can use these accounts to save larger sums without disqualifying the beneficiary from means-tested programs like:
- SSI (Supplemental Security Income)
- Medicaid
- SNAP and EBT (food assistance)ABLE Account – Tax Advantaged Accounts For Differently-Abled People
- HUD (housing assistance)
- And FAFSA loans
Because ABLE disability accounts are state-operated, they’re cheaper and quicker to set up than a Special Needs Trust. They may also be less limited in their definition of “qualified” expenses, enabling individuals to retain greater financial independence.
Who Qualifies for ABLE Accounts?
Individuals can qualify for an ABLE account in a few ways, but all must meet one basic criteria: the accountholder’s disability must have onset before age 26.
The beneficiary must meet the following requirements:
- the eligible individual who owns the ABLE account. Only one ABLE account is allowed per person.
- entitled to disability insurance benefits (DIB), childhood disability benefits (CDB), or disabled widow's or widower's benefits (DWB) based on disability or blindness that began before age 26
- someone who has certified, or whose parent or guardian has certified that he or she met the criteria for a disability certification before age 26.
If you meet the age requirement and receive SSI and/or Social Security Disability Insurance, you’re automatically eligible to open an ABLE account.
If you don’t receive government benefits but otherwise qualify, you may still be eligible if you:
- Meet Social Security’s definition of “disability”
- Meet criteria regarding functional limitations
- Receive a letter certifying your disability from a licensed physician, Doctor of Medicine, Dentistry, or Podiatric medicine, optometrist, or chiropractor*
*Discounts disability letters from psychologists, clinical therapists, or vocational rehabilitation counselors.
Opening and Funding ABLE Disability Accounts
ABLE accounts function similarly to educational 529 plans. As with regular 529 plans, states establish and maintain their own ABLE programs, including contribution limits. Currently, only 4 states (Idaho, Wisconsin, and North and South Dakota) don’t run ABLE programs. The remaining states all offer ABLE accounts to citizens, and the bulk permit out-of-state residents to apply, too. That makes it easier to shop around for the best ABLE program that meets your needs. Another similarity between 529 and ABLE accounts is their funding and investment opportunities. Anyone can contribute to an individual’s ABLE account. And once contributed, the funds can be invested and withdrawn tax-free. However, ABLE contributions aren’t tax deductible for federal purposes, meaning you have to pay taxes on contributions. Some states do offer local income tax deductions on ABLE contributions. One major difference between regular 529 and ABLE accounts occurs after the inevitable. When the account owner dies, their resident state can claim some or all of their remaining ABLE funds to recoup Medicaid expenditures.
How Many ABLE Accounts Can I Open
You can now have one ABLE account per person. That said, you can transfer your existing ABLE account to another state if you find a plan with better benefits.
What is the Maximum Contribution to an ABLE Account?
As of 2024, you can contribute up to $18,000 per year total from all sources, to an ABLE account. This happens to be the annual gift tax limit exemption. However, there’s one exception to this rule. Employed ABLE account owners who can’t access an employer-sponsored retirement plan can make additional contributions up to the lesser of:Their compensation for the tax year
Do ABLE Accounts Have Minimum Contribution Limits?
ABLE disability accounts have no minimum contribution limits. You can get started with $5, $50, or $5,000 – whatever you can afford.
ABLE Account Investment Options
Like regular 529 plans, states offer individuals with disabilities multiple investment and savings options. After evaluating your financial needs and risk tolerance, you can invest to secure your long-term stability. Additionally, the ABLE Act permits account owners to adjust their investment allocations twice per year to meet changing needs.
What are Qualified Expenses for an ABLE Account?
Broadly speaking, “qualified disability expenses” include any purchases that “help improve health, independence, and/or quality of life.” Updated guidelines also “permit the inclusion of basic living expenses,” including items with no direct medical necessity or that may provide benefits to others.
A distribution is the withdrawal from an ABLE account. Distributions are only to or for the benefit of the designated beneficiary.
Distributions must be for qualified disability expenses (QDEs). QDEs fall into 11 broad categories and may include basic living expenses (for housing for example) or items or services related to health, prevention, and wellness. Other examples of QDEs related to work include transportation to and from employment, job coaching, costs for accreditation. Essentially it covers everything from healthcare and disability-related needs to housing, education, transportation, legal fees, living expenses like food and utilities, and more. The Social Security Administration provides a more complete list here.
If you withdraw cash from an ABLE account, spend it on your qualifying expense. Don't transfer it to a normal bank account or hold onto the money. If you don't spend the money, it might be counted as a resource for benefits programs. For example, if you take $3,500 out of an ABLE account and put it into a regular checking account instead of spending it, you will go over the $2,000 resource limit for SSI.
What Can an ABLE Account Not Be Used For?
Despite the broad range of allowable expenditures, ABLE accounts for disabled individuals have some limitations.
For instance, taking a vacation to receive medical treatment could count as a qualified expense. But taking a cruise “just because” falls into a grey area. While it improves your quality of life, it’s not a “necessary” expense.
The same is true of modern needs like a smartphone or computer. ABLE accounts permit using funds for these expenses. But buying, say, a second computer or high-tech gaming console wades into grey territory.
Bear in mind that spending ABLE funds on non-qualified expenses can count against your eligibility for means-tested benefits. You may also have to pay income taxes plus a 10% penalty on withdrawn funds.
And of course, you can’t use ABLE funds on illegal purchases, such as to buy illicit drugs.
ABLE Disability Accounts: Pros and Cons
ABLE accounts for disabled individuals provide much-needed savings opportunities for those who need it most. Still, they’re not perfect, and you may find you need to supplement with a Special Needs Trust, as well.
What are the Advantages of an ABLE Account?
- You can accumulate more than $2,000 without jeopardizing eligibility for means-tested public benefits
- Lifetime contribution limits are fairly high and aren’t subject to gift tax restrictions
- Choose your own savings or investment strategy
- Savings grow tax free, much like a retirement account. Income earned in the accounts and withdrawals for qualified distributions will not be taxed.
- Easy to set up or rollover across state lines
- The beneficiary maintains control of the account (absent guardianship or power of attorney), giving them more financial control
- Both SSI and Medicaid disregard the first $100,000 in assets in an ABLE account. That portion of assets does not count towards Social Security Income or Medicaid qualification as a resource.
What are the Disadvantages of an ABLE Account?
- You’re only allowed one ABLE account per individual, so you can’t keep saving when you hit the lifetime savings cap
- Must develop your disability before your 26th birthday
- Total annual contributions limited to $16,000 (plus $13,590 if you work but don’t contribute to an employer-sponsored retirement plan)
- Accumulating over $100,000 suspends your SSI payments
- Any funds remaining upon death can be seized by the state to recoup Medicaid expenditure
How To Setup an ABLE
Most states have their own ABLE account programs, though you can open an account in any state. For example, California's ABLE account program is CalABLE. Even if your own state has an ABLE program, you can compare and choose between different state ABLE account programs.
Ask the following questions:
What investments does it offer? For example CalAble offers specific portfolio options. You choose a risk profile and the assets are invested accordingly.
Is the money easy to access for qualifying expenses. For example, does the account come with a debit card?
Is customer support reachable?
What fees does the program charge?
The process can generally be started online. Find your state program and apply!
Special Needs Trusts vs ABLE Accounts
Special needs trusts s vs ABLE accounts have different advantages.
ABLE accounts are generally:
- Easier (and cheaper) to open
- Easier to access
- Gives the beneficiary more control over the account
- The first $100k generally does not count against SSI or Medicaid benefits
Make Sure Your ABLE Account Fits Your Needs
ABLE accounts are a useful tool for disabled individuals who need a little more financial oomph. They let you save more, invest wisely, and grow your lifetime income to cover essential expenses. Still, they do have some limitations, so you may consider whether a Special Needs Trust is also needed.
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