One of the newer financial products out there today is ABLE accounts, a 529 account with all kinds of bells and whistles designed specifically to serve Americans with disabilities.
After years of grassroots advocacy efforts from the disability community, ABLE accounts were put into legislation in December 2014.
Why open an ABLE account?
The 529 accounts are usually state sponsored and used to save for your child’s college education. Although you can’t deduct your contribution, the money grows tax-free and is not taxed when withdrawn to cover approved college expenses, particularly tuition fees.
if I were The father of a disabled child, their future in higher education may be unclear. However, an ABLE account allows you to save or invest money for a potential college experience, but the money can also be used for a myriad of other life expenses.
Outside of saving for college, there are many reasons why individuals with disabilities or parents of disabled children might want to open an ABLE account.
Asset Tests: Supplemental Security Income and Beyond
When you are disabled, state and federal assistance programs can make it difficult to achieve financial independence. For example, in order to access Supplemental Security Income benefits, you are generally only allowed to have $2,000 worth of assets. The SSI resource limit is $3,000 for couples. Assets can include the value of your bank account, a second vehicle, life insurance policies, cash on hand and more.
Benefit programs aimed at people who meet income requirements – usually low incomes – are referred to as “tested means”. Qualification depends on the means of the applicant. These types of programs make it nearly impossible for individuals and families to save money because they can be disqualified when savings reach a certain level. Asset limits pose a particular problem for individuals with disabilities who live near or below the poverty line, as they are more likely to need additional savings for frequent medical financial emergencies.
Other public benefits based on income
SSI is not the only public benefit program that has been tested. Many states may have an asset limit associated with Medicaid or access to Medicare when you are disabled. There are many other benefits that you may need to access that come with Asset Tests as well.
ABLE accounts solve this problem across many programs. The first $100,000 you save in your ABLE account cannot be counted for SSI benefits. Any amount saved in an ABLE account cannot count toward asset tests for nearly all other federal benefits tested by federal means—such as Medicaid.
ABLE accounts can act as savings accounts with tax privileges or as an investment vehicle. The interest earned on your ABLE account is not taxable for federal income tax purposes. Depending on your state of residence and the state that issued your ABLE account, you may not have to pay state taxes on interest either.
Look for tax parity
In some states, you can avoid the state tax burden on ABLE accounts even if you purchase from out-of-state ABLE programs.
Says Paul Curley, Director of 529 & ABLE Research at ISS Market Intelligence.
He says that you should review your state laws to review any potential state tax benefits associated with ABLE programs, including tax equivalence.
It’s important to note that there is a caveat to all of these tax savings, both for state and federal income tax: They only apply if you withdraw money for qualified disability expenses.
What are eligible disability expenses?
With a traditional 529 account, the interest isn’t taxed as long as you use your withdrawals for eligible expenses related to higher education — or in some rare cases, K-12 education.
ABLE accounts are different. While you can use the money saved in this account for higher education, the list of eligible disability expenses is much more powerful. Almost anything related to the life of a disabled person counts as a qualifying disability expense with an ABLE account, including but not limited to:
- housing costs
- Employment training and support
- Assistive Technology
- Personal Support Services
- health care expenses
- Prevention and wellness
- Financial management services
- Administrative Services
- Legal fees
- Burial expenses
- Other basic living expenses
Who can open an ABLE account?
Currently, you are eligible to open your ABLE account if you have a Social Security Administration disability certificate, and you were under 26 at the time of start. You can also open an ABLE account on behalf of your disabled child if they meet the same requirements.
An eligible individual does not have to receive Supplemental Security Income (SSI) or any other benefits in order to qualify.
Legislative Efforts to Expand Eligibility
The age requirement for ABLE accounts is a problem, as many disabilities do not appear until later in life. Additionally, 25% of American adults become disabled between age 20 and the traditional retirement age. Because of these facts, a legislative effort is in the works to raise the times.
The standard annual contribution limit for an ABLE account is $15,000. Anyone can contribute to achieving this maximum – the disabled individual, family members, friends, etc.
Until 2025, working adults with disabilities are allowed to nearly double their contributions to ABLE accounts through the ABLE to Work Act.
Any income from your job can be allocated to the ABLE account up to the Federal Poverty Line amount according to the Internal Revenue Service. In 2021, this means that in addition to the standard contribution limit of $15,000, eligible individuals residing in the neighboring 48 states can contribute an additional $12,880 of their business earnings. This makes the maximum total annual contributions $27,880 in most states.
“As ABLE to Work is set to sunset in 2025, a number of advocates and stakeholders are focused on expanding the provision of ABLE to Work,” Kerley says.
Avoid Medicaid Recovery
When the beneficiary dies, any money remaining in the ABLE account balance can be used for burial expenses. In many states, any balance left in the beneficiary’s ABLE account after burial expenses are calculated will be paid to the state for Medicaid reimbursement.
Compare at ABLE National Resource Center
Over 40 states have their own ABLE programs to date, and you can purchase plans across state lines.
When deciding which state ABLE accounts are best for you and your child, you’ll want to consider any state tax benefit, statewide Medicaid recovery rules that require certain postmortem payments, and fees.
“Most plans include an annual or monthly account maintenance fee in addition to an investment-related fee,” Kerley explains. “Be aware sum fees when both categories are taken into account.”
If you want an easy way to compare plans and save money on fees across state lines, you can use a resource like National Resource Center ABLE.
Brian Conroy, a Pittsburgh-based writer, is the founder of the Femme Frugality blog and author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.