Seven Questions and Answers About
ABLE accounts are tax-advantaged savings accounts that were created as a result of the Stephen Beck Jr. Achieving a Better Life Experience (ABLE) Act. Now that many states have launched ABLE programs, you may have questions about how these accounts work and how they may help you or a family member save for disability-related expenses.
Why open an ABLE account?
Retaining eligibility for Medicaid, Supplemental Security Income (SSI), and other much-needed public benefits depends on meeting a means or resource
test. Individuals may have only $2,000 in countable assets, such as savings and
retirement funds. This makes it very difficult to establish financial
independence and save for most disability-related expenses, including those not
covered by public benefit programs.
ABLE accounts help address this problem. Because funds in an ABLE
account will generally not count toward this asset limit, individuals with disabilities may put money
aside for their future needs without jeopardizing their eligibility for public
Regardless of the balance, money in an ABLE account does not affect an individual's eligibility for Medicaid, but any account balance over $100,000 may temporarily affect SSI eligibility. When an ABLE account exceeds $100,000,
SSI payments will be suspended until the account balance falls back to the level required.
Who is eligible to open an ABLE account?
If you have a significant disability that began before age 26, you may be eligible to open an ABLE account. If you meet that age criteria and are already receiving SSI or Social Security Disability Insurance (SSDI), you automatically qualify. You may also qualify if you're not receiving those benefits but you meet Social Security's definition of disability and are able to obtain certification from a physician.
If you have a family member who qualifies, you may be able to open and oversee an ABLE account on that person's behalf if you are legally authorized to do so (for example, you're the parent or legal guardian of a minor or someone who is legally unable to manage his or her account, or you have power of attorney). The individual with the disability remains both the account owner and the beneficiary.
No matter who opens the account, each eligible beneficiary can have only one ABLE account.
Can you open an account in any state?
You can open an ABLE account in your own state if your state has an ABLE program or
in any state that allows nonresidents to join (most do).* Contributions can then be made by the account owner or by family members,
friends, employers, or others who want to provide financial support.
What investment options can you choose?
Plans generally offer several investment options that target different investment strategies and levels of risk. Some programs also offer an interest-bearing option such as a checking or savings account. Account contributions will be invested in whatever
option(s) you choose. Federal rules allow you to
reallocate previously invested money twice per calendar year, but you can change your investment options for new contributions at any time.**
How much can you contribute?
Annual and lifetime contribution limits apply. Each year, contributions from all
donors combined may not exceed the annual federal gift tax exclusion for that year. In 2017, this limit is $14,000. Each state sets its own lifetime
limit, which is also the state's maximum limit for Section 529 college savings plans. In many states this limit is at least $350,000.
What tax benefits do ABLE accounts offer?
Any account earnings accumulate tax deferred at the federal level (and in some cases at the state level). When money is withdrawn, the earnings on these distributions will be
tax-free if they are used to pay qualified expenses. While no federal income tax deduction is available, some
states may offer tax incentives to
residents. Check with your financial or tax professional for more information
on your state tax benefits, and information on your situation.
What can ABLE funds be used for?
Money in an ABLE account must be used for qualified
disability expenses. In general, a qualified disability expense is one related
to living with a disability, including transportation, health care, personal assistance, assistive technology, employment training, and legal fees. It's up to you to track how
ABLE funds are spent — you won't be required to submit documentation to the program.
However, keep in mind that the earnings portion of a withdrawal not used for a qualified expense may be subject to ordinary income tax and a 10% federal income tax penalty.