A tax favored savings tool, called an ABLE account, is giving disabled individuals and their families a new way to save for living expenses without compromising their eligibility for public benefits.
The Achieving a Better Life Experience Act of 2014, more commonly known as the ABLE Act, enables account owners to save up to $15,000 per year for qualified housing, education, personal assistance services, health care, employment training, assistive technology, and transportation needs related to their disability. Contributions from the beneficiary, their family, or friends are made with after tax dollars, and thus not tax deductible. But any income earned in the account and used for qualified disability expenses can potentially be withdrawn tax free.
The new tax law passed in December 2017 also included provisions that allow families who have saved money in a 529 college savings account to roll over up to $15,000 annually from their 529 account to an ABLE account, as long as the beneficiary is the same individual on both accounts, or a family member of the 529 account beneficiary. (Learn more: Getting the most from 529 plans)
An employed ABLE account owner who does not participate in an employer sponsored retirement account may also now be eligible to make an additional contribution up to the lesser of either their compensation for the tax year, or the poverty line amount of $12,490 (for 2020) in the continental U.S., $14,380 in Hawaii and $15,600 in Alaska, according to the ABLE National Resource Center (NRC).1
“Obviously the tax advantages are important, but the true benefit of ABLE accounts is the fact that folks with disabilities who rely on support and services through federally funded programs, such as Medicaid, can now save for the first time without jeopardizing their eligibility for vital benefits that help them maintain their independence,” said Chris Rodriguez, director of public policy for the National Disability Institute.
Modeled after 529 college savings plans, ABLE accounts are administered by individual states. Rodriguez said his organization is working diligently to boost awareness of ABLE savings accounts, which are still largely unknown to many families with a disabled loved one.
Prior to passage of the ABLE Act, the ABLE National Resource Center notes Americans with disabilities were forced to keep their cash savings and other assets (including retirement accounts) below $2,000 per year to qualify for government benefits, such as Medicaid, Medicare, and Supplemental Security Income (SSI) — programs they often need to help cover the added costs of managing and treating a disability.2
Costs related to disabilities vary dramatically depending on the diagnosis, but may include medical treatment, special education, lost parental productivity, and modifications needed to the home or family vehicle, as needed.
Choose the right plan
As with a 529 college savings plan, individuals can open an ABLE account in any state that accepts outside residents into their program. Eligible account holders, however, should compare their options carefully, as each state program has its own set of rules and restrictions. (Learn more: Planning for LTC needs)
Some, for example, offer a state income tax deduction or credit for contributions made into accounts by state residents, while others charge an annual fee to maintain the account or require an initial minimum contribution. Others offer more investment options, or restrictions in the number of disbursements they allow.
Importantly, states also differ in the total account limit (from all contributors). Virginia allows up to $500,000, for example, while Oregon allows $400,000.
To help families determine which state-based option is right for them, the NRC offers an online tool to compare program characteristics for up to three state plans at a time.
The SSI limitation
Supplemental Security Income (SSI) falls under the Social Security umbrella. It is designed specifically to provide disability benefits to low-income individuals who have either never worked or have not accumulated enough Social Security credits to collect traditional Social Security Disability Insurance benefits.
If you currently collect SSI, take note that ABLE accounts could still jeopardize your eligibility. Indeed, the first $100,000 in ABLE accounts is exempt from the $2,000 individual resource limit for SSI, but the SSI cash benefit is suspended if your account exceeds $100,000. The benefit would be reinstated if and when the ABLE account value falls back below that threshold.
The same account limitations do not apply to Medicaid benefits. The ABLE National Resource Center notes, however, that state Medicaid programs may attempt to recover some of the costs incurred in providing care to beneficiaries after they pass away. Under Medicaid Pay-Back provisions, the state where the individual lived could file a claim against any remaining money in the beneficiary’s ABLE account for all or some of the funds spent on the beneficiary during their lifetime.3
ABLE accounts, of course, are not the only savings mechanism available to disabled individuals and their families. And they aren’t necessarily the best, said Alex Nadworny, a financial advisor with Shepherd Financial Partners in Winchester, Massachusetts, who specializes in helping clients with a disabled family member.
“ABLE accounts can be a useful tool, but it’s not the only solution,” she said. “There is a $15,000 per year limit, so it can really only be one small piece in their overall financial plan. Other savings vehicles may provide more flexibility.”
The parents of a disabled child, for example, can potentially accumulate savings in their own name to avoid challenges to benefits eligibility, she said. “Often, that’s how parents save,” said Nadworny. “They earmark different accounts for their child and have the funds go into a Special Needs Trust upon the parent’s passing.”
Those with a disability can also potentially use a Roth Individual Retirement Account (IRA) to sock money away, she said, which similarly provides the opportunity for tax-free growth, but may allow for greater flexibility and more robust investment options. (Learn more about Roths)
As ABLE accounts become more readily available, Nadworny said they may also be used more creatively in tandem with Special Needs Trusts. “You could potentially use your ABLE account to help pay for ongoing housing expenses, like mortgage payments and rent, which is something you are not able to do in a Special Needs Trust,” she said. “If you work with a team of professionals who understand the rules, you could potentially create a more comprehensive plan that includes ABLE accounts for housing.”
Nadworny said ABLE accounts are a great way for disabled individuals who are employed to accumulate a cash cushion, and for grandparents to gift money to disabled grandchildren without worrying about compromising their benefits.
“In certain situations, ABLE accounts can make a lot of sense,” she said. “We even recommend opening one to teach children financial management skills, perhaps by attaching a debit card to the account to teach them money skills.”
A financial advisor, ideally one who understands the impact that various savings accounts have on disability benefits, can help you determine whether an ABLE account, an alternative, or a combination of both may be right for you.
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This article was originally published in June 2018. It has been updated.
1 ABLE National Resource Center, “About ABLE Accounts,” 2020.
2 Disability Benefits Center, “SSDI How to Qualify,” 2017.
3 ABLE National Resource Center, “What are ABLE Accounts?” 2018.