Is an ABLE Account Right for You?
What You Need to Know About an ABLE Account
Prior to 2014, with the exception of a Special Needs Trust, there were very few financial vehicles available to provide care for individuals living with a disability. For almost a decade, various advocacy groups for the disabled began to lobby Congress, and then in 2014, an act was passed.
This new law was known as Achieving a Better Life Experience, or ABLE as it is most commonly referred to today. In its simplest form, an ABLE account permits creating tax advantaged accounts for individuals with disabilities to be able to save money. The new law allowed those persons to have these accounts, and in doing so, it would not jeopardize their eligibility to receive funds from government programs.
A very important advantage of having ABLE accounts is that all income earned cannot be used as a part of means testing for Supplemental Security Income, (SSI) or for Medicaid. Any funds deposited in an ABLE account for the disabled individual, up to $100,000, is not counted as an asset.
ABLE accounts still are not fully understood, or for that matter, widely used. As of this writing, there are approximately 57,000 accounts that have been opened in the United States. This statistic is according to the National Association of State Treasurers.
Many individuals are still under the impression (pre 2014 thinking) that an ABLE account is considered as an asset of the disabled individual. The new law was designed so that it would not be an asset, as long as the total funds in the account didn’t exceed $100,000. Plus, the money withdrawn must be a qualified expense attributed to the disability of the beneficiary.
If you, or someone you know, has a disability, or maybe a child that is disabled, the following 8 topics may answer any questions that you have concerning ABLE accounts.
Why should I open an ABLE account?
Simple reasoning! Anyone that lives with a disability, or has a child with one, knows very well just how costly it can be. A Special Needs Trust doesn’t cover many different types of expenses, especially a disabled individual’s living expenses. ABLE accounts do.
The out of pocket money for certain medical expenses plus additional costs for education, housing, and transportation, can be a big financial hit for a disabled person. Even though they may be getting benefits and income from a government program, such as Medicaid and SSI, it often isn’t enough. Additionally, they aren’t able to save money for future expenses.
Medicaid and SSI limit a disabled individual’s total assets to $2,000. How can they possibly live on that limitation? For that reason, this is why Congress, with a lot of persuasion, created the ABLE account. It gives them an opportunity to accumulate assets to cover future needs without violating the rules of SSI and Medicaid.
Scott Butler, who is a retirement income planner with the firm of Klauenberg Retirement Solutions, based in Laurel, Maryland, had this to say about ABLE accounts. “An ABLE account allows a disabled person to accumulate assets that they have control over.”
This certainly is true, as long as the ABLE account stays within certain limits, namely the $100,000 ceiling. Plus, this money isn’t considered when calculating the government asset limitations.
Is anybody eligible to open an ABLE account?
In order to be eligible, you must have been diagnosed that you were disabled or blind before you reach the age of 26. Anyone who is already getting SSI or Social Security benefits, is automatically eligible to open an ABLE savings account.
Other individuals must qualify under Social Security’s definition of a disability. Plus, a letter from a physician is required stating those facts as well. The ABLE National Resource Center states that a person will qualify after that.
PinAre ABLE accounts a federal program?
ABLE accounts are offered at the individual state level, and not a part of any federal program. At the present time, ABLE accounts are offered by 43 states and the District of Columbia. If the state that you live in doesn’t offer ABLE accounts, you can open one with another state that does.
You need to be aware that not all of these states offer an ABLE account to a non-resident. At the present time, about 26 of the 44 jurisdictions will allow a non-resident to open an ABLE account. Each state has their own limitations and rules, so check them out carefully.
How does an ABLE account become a tax incentive?
ABLE accounts operate just like the 529 Plans that are used for college savings. They also offer tax incentives if you are a resident of that state.
As an example, Maryland allows a maximum deduction of $2,500 for each ABLE contribution, per year, on the state return. If a joint couple each contributes $2,500, then a total deduction of $5,000 is allowed on the joint tax return. If you contribute more that $2,500 in any one year, the excess can be carried forward for 10 years.
The state of Illinois allows a deduction of $10,000 in contributions for a single filer and $20,000 for a jointly filing couple.
Not all states offer a deduction as a tax incentive for residents. Scott Butler says that when selecting a different state’s ABLE accounts, to check out their fees and investment options first. “Sometimes you’ll do better by forgoing the state tax deduction and choosing a plan with better investment options.”
Withdrawals from ABLE accounts are tax free, no matter which state you choose, as long as the money is being used as a qualified expense attributed to the disability of the beneficiary.
Am I limited to a certain amount I can contribute each year?
By law, the maximum amount that can be contributed to an ABLE account each year is $15,000. Plus, anyone can make contributions as long as the total amount contributed doesn’t exceed that amount.
Be advised that up to $100,000 is shielded from the Medicaid and SSI means testing. If the account balance exceeds that amount, it probably will have an adverse effect on your SSI benefits.
There was a rule change effective January 1, 2018, regarding a rollover from a college 529 Plan. The updated law permits funds (up to $15,000) to be transferred from a 529 College Plan to an ABLE account. But there are situations where this is not advisable, so before making a transfer, consult with a qualified Special Needs individual.
What expenses can I pay from an ABLE account?
Funds can be withdrawn from ABLE accounts for any expense that is coincidental to the person’s disability. The Social Security Administration has listed a page full of expenses and has also added at the end, “basic living expenses” which includes food, clothing, etc.
Any funds that are used for non-qualified expenses could be subject to a 10% penalty and taxable income at ordinary rates.
Is there a cost to open an ABLE account?
There are fees charged by each state, so you need to make a comparison. As an example, the state of Ohio has a $30 fee each year for residents and $42 for non-residents. These fees are in line with fees charged on IRA accounts administered by various mutual funds.
Depending on the funds chosen in your ABLE savings account, there may be additional investment fees charged. Plus, an asset management fee that compensates the mutual fund manager for his/her work in managing the fund.
This is why it’s so important to carefully review the state’s ABLE accounts investment portfolio so that you may make a proper analysis of all fees charged. After that review, you can select the plan you’re most comfortable with.
Maybe I should consider using a Special Needs Trust instead?
Some individuals still prefer to use a Trust instead of an ABLE account. This type of Trust is also known as a Supplemental Needs Trust. There are situations where a Trust might be the answer, but again, discuss this with a qualified Special Needs individual.
It should be noted that if you decide to go the Trust route, costs can be quite high. To have an experienced Trust attorney prepare the Trust documents, the cost can range from $2,000 to $5,000, and sometimes higher.
For those who became disabled after the age of 26, the Trust may be the only option available. Also, the Trust can’t pay for basic living expenses such as rent, mortgage, utilities, or food and clothing for the disabled person. An ABLE account can!
Here’s a helpful link that covers all of the states that offer ABLE accounts: