ABLE accounts are savings accounts for individuals with disabilities and their families. These accounts are a newer kind of financial plan, which emerged as a result of the Stephen Beck Jr., Achieving a Better Life Experience Act of 2014, also referred to as the ABLE act of 2014. ABLE accounts are a type of tax-advantaged savings account; a financial plan that is exempt from taxation. Transfers to these accounts must be made using post-tax dollars and are not federally tax deductible. Instead, ABLE accounts are rewarded special tax benefits, which make it so that the earnings of the account remain untaxed. As long as the money is used for “qualified disability expenses”, such as education, medical treatment, transportation, housing, legal fees, or other costs associated with disabled living, it will not be subject to taxation.

When an ABLE account is established, the beneficiary of the account is also the account owner and any income earned by the account will not be taxed. Any individual can contribute funds to an ABLE account. As stated earlier, the beneficiary will only be taxed if the money that is withdrawn from the account is used for something other than “qualified disability expenses”. In addition to the earnings being taxed in this scenario, there would be an additional 10% federal tax penalty that will also apply to the portion of one’s withdrawal that is comprised of earnings.

Millions of people with disabilities and their families rely on public benefits for income, housing, food, and healthcare, among other needs. However, in order to remain eligible for these benefits, an individual must cumulatively have no more than a nominal amount in savings or other property. In other words, these benefits are dependent on the disabled individual living in a state of relative poverty. The ABLE act recognizes that living with a disability comes with significant extra costs. ABLE accounts acknowledge that certain living situations can come with unprecedented costs and that savings should be set aside to address these needs. For example, there are individuals who are disabled and raising children, and individuals who are caring for working-age adults, both of whom will need assistance. Both of these living situations come with added expenses that cannot be accounted for by typical benefit programs or savings accounts. Accessible housing and transportation, assistive technology, and healthcare that is not otherwise covered by medicaid or medicare, are just a few of the myriad of expenses these individuals and their families are likely to face. ABLE accounts recognize disabled individuals’ need for funds in addition to their benefits, and helps to meet each of these needs. ABLE accounts allow disabled individuals to supplement their benefits with additional funds aimed specifically at improving quality of life and accessibility.

Since the ABLE Act was passed in 2014, those who are eligible are allowed to create accounts that will largely not affect supplemental security income, Medicaid or other public benefits. In order to be considered eligible, the onset of an individual’s disability had to have occured before the individual turned 26 years old.

The maximum amount of money that can be contributed annually cannot exceed $15,000, for a single tax year. This maximum amount is adjusted periodically in order to account for inflation. $15,000 is also the maximum amount an individual can gift without having to report the gift to the IRS. One can exceed the $15,000 a year maximum contribution if and only if one is self-employed or employed without an employer-issued retirement savings plan. The sum total of the additional contributions cannot exceed the previous year’s federal poverty line for a single person household, or the beneficiary’s taxable compensation (income) for the current year if it is lower than that of the federal poverty line. The cumulative maximum one can contribute depends on the individual’s state of residence and their education-related 529 savings plan. Some states have a contribution maximum as high as $300,000 per plan.

However, the recipients of supplemental security income (SSI) will face some limitations if their plan is above a certain value. The first $100,000 that is contributed to the ABLE account will be exempt from the SSI’s individual resource limit of $2,000. If the account appreciates to an amount above $100,000, the beneficiary’s SSI benefit is suspended until the account is spent down to an amount below $100,000. It is important to note that even if an individual’s SSI is suspended due to an ABLE account balance being too high, the individual’s Medicaid eligibility will not be affected. However, upon the beneficiary’s death, the state may try to file a claim to all or some of the funds that were in the ABLE account. The claim will be equal to the amount that was spent on beneficiary through the state Medicaid program. ABLE accounts only secure financial assets for the duration of the beneficiary’s life.

The expenses that can be covered by ABLE are relatively broad, in that they can be used to cover any expense that results directly from being disabled or living with a disability. It is important to note that the ABLE Act only allows for one account per individual. A single individual cannot have more than one ABLE account. The ABLE account allows contributors and the beneficiary to change the investment strategy of the account up to two times per year.

While ABLE is a federal act, its programs are created on the state level. Since ABLE accounts are relatively new, not all states have established ABLE programs. Due to the limited number of ABLE programs available, individuals are allowed to join ABLE programs of any state, if the state in question allows for out of state membership. There are about 30 ABLE programs nationwide, and there are various investment options to consider. Please see other articles within this blog for articles on New York State.

An ABLE account in conjunction with private savings should secure enough funding for disability expenses to supplement, but not replace, the benefits received from private insurance, Medicaid, SSI, employment, or other means. There could be advantages to establishing a trust instead of an ABLE account, the details of which should be discussed with an attorney.