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Tax-Advantaged Savings for People With Disabilities: ABLE Accounts
For years, tax laws have included tax-favored programs to save money for retirement (IRAs), for health care (HSAs), or for college (529 plans). But there have never been tax-advantaged savings plans specially designed for people with disabilities. That changed with the Achieving a Better Life Experience Act of 2014 (ABLE).
Beginning in 2015, states were authorized to create savings plans that would allow people with disabilities or their family members to set up an ABLE account that can grow tax-free and can be used to pay for expenses related to living with a disability. Assets in the account are generally not counted toward the $2,000 asset limit for Supplemental Security Income (SSI). For many families, ABLE accounts could prove to be a pathway to independence and an inexpensive and easy alternative to special needs trusts.
Eligibility for an ABLE account
Eligible individuals must be blind or have a disability, and must be entitled to SSI or Social Security Disability Income (SSDI) benefits (even if they don't actually receive benefits). In addition, the onset of blindness or the disability must have occurred before age 26. Many of the definitions that shape eligibility will be determined by individual states, likely based on existing Social Security Administration definitions.
SSI, SSDI, and Medicaid eligibility
For most people, ABLE accounts will not affect eligibility or payments related to SSI, SSDI, or Medicaid. An exception: Payments for housing count as income for SSI purposes. Also, only the first $100,000 in the account is excluded from the $2,000 asset limit for SSI. An individual with more than $102,000 of assets will remain eligible for Medicaid, but will be suspended (but not terminated) from eligibility for SSI for as long as the individual’s assets exceed the limit.
Contributions are with after-tax dollars
A person with a disability may have only one ABLE account for his/her benefit, but more than one person can contribute to it. Contributions to the account are made with after-tax dollars, and there is no tax benefit to the contributor.
The total contributions to an account (by all people) are limited to $14,000 each year. This limit may increase for inflation. Assets in an ABLE account grow free of tax, and there is no tax on the income or on the value of the assets while they are in the account.
Tax-free distributions from an ABLE account
Distributions from an ABLE account are tax-free as long as they are used to pay disability-related expenses. This is the case regardless of the beneficiary’s age. Specific examples of allowable expenses are:
- Employment support
- Health, prevention, and wellness costs
- Assistive technology
- Personal support services
- Financial management services
- Legal fees
- Funeral and burial expenses
If distributions are made for expenses not related to a disability, the portion of the payment attributable to earnings is taxed at the beneficiary’s rate and there is a 10 percent penalty.
If the disabled person dies, any amounts in an ABLE account after Medicaid reimbursements will go to the decedent’s estate or designated beneficiary, and will be subject to tax on the earnings (but not penalized).
States are still formulating their plans
Although 2015 federal legislation allows states to create these accounts, none have a plan operating at this time. Recent rule changes will allow a person to open an account in any state, although some may choose not to create their own plans. Details, such as how to structure account setup and which financial institutions will participate, are still being determined. The National Down Syndrome Society website has a list of the states that have provided updates of their ABLE programs.
In addition, it is uncertain how state and county disability service agencies will view the accounts. Some fear that government agencies providing financial support for people with disabilities may subject individuals holding ABLE accounts to a cost-sharing assessment or expect/require that payments for certain services come from the account. Nonetheless, ABLE accounts are expected to provide opportunities to improve the quality of life for people with disabilities.