Most people would agree that managing finances and healthcare costs for individuals with disabilities can be extremely challenging.
But with the Achieving a Better Life Experience (ABLE) Act, new tax-advantaged savings accounts provide a powerful tool to better cover qualified disability expenses.
This article will explain what the ABLE Act is, who is eligible for ABLE accounts, how the accounts can be funded and used, key tax benefits, and how ABLE plans compare to Special Needs Trusts. You'll get a comprehensive overview of ABLE accounts so you can utilize them strategically.
Introduction to the Achieving a Better Life Experience (ABLE) Act
Overview and Purpose of the ABLE Act
The ABLE Act was passed in 2014 to help individuals with disabilities save money for disability-related expenses without losing eligibility for federal aid programs like Medicaid and Supplemental Security Income (SSI). The purpose is to improve the quality of life for people with disabilities by making tax-advantaged savings and investment accounts available.
Key Provisions of the Law
To be eligible for an ABLE account, an individual must have developed a qualifying disability or blindness before age 26. Total annual contributions are limited to the federal gift tax exclusion amount, which in 2023 is $17,000. Funds in an ABLE account can be used to pay for qualified disability expenses related to housing, transportation, healthcare, assistive technology, and more without impacting SSI benefits.
Tax and Other Benefits
ABLE accounts provide tax benefits similar to 529 college savings plans. While contributions are not tax deductible, funds grow tax-free and can be withdrawn tax-free if used for qualified expenses. An additional benefit is that assets in an ABLE account are not counted towards the $2,000 individual resource limit for SSI benefits.
What is the Able Act for achieving a better life experience?
The Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act became law on December 19, 2014 with the aim to help individuals with disabilities and their families gain greater financial independence and improve their quality of life.
Specifically, the ABLE Act allows people with disabilities to open a tax-advantaged savings account called an ABLE account. Funds in an ABLE account can be used to pay for disability-related expenses without affecting eligibility for means-tested federal programs like Medicaid and Supplemental Security Income (SSI).
Some key things to know about ABLE accounts:
- They can be opened by eligible individuals to save money for qualified disability expenses without losing needs-based benefits.
- Earnings in an ABLE account are tax-free if used for qualified expenses.
- Total annual contributions are limited based on the gift tax exclusion.
- ABLE account balances are excluded from the SSI individual resource limit.
- Each state can create its own rules around operating ABLE accounts. Most states have partnered with financial institutions to provide ABLE plans.
In summary, the ABLE Act aims to help improve financial well-being and quality of life for people with disabilities by making tax-advantaged savings accounts available. ABLE accounts provide more flexibility and control over finances.
What is the Able Act in public law?
The Achieving a Better Life Experience (ABLE) Act (Public Law 113-295) is federal legislation signed into law by President Barack Obama on December 19, 2014. This law amended Section 529 of the Internal Revenue Code to allow tax-advantaged ABLE savings accounts for eligible individuals with disabilities.
Some key points about the ABLE Act:
- It allows people with disabilities to save up to $100,000 in ABLE accounts without affecting eligibility for Supplemental Security Income (SSI), Medicaid, and other public benefits.
- Earnings in an ABLE account aren't subject to federal income tax, as long as they are spent on qualified disability expenses.
- Contributions can be made by the ABLE account beneficiary or others, up to the annual gift tax exclusion amount ($16,000 in 2023).
- Total contributions are limited to the state's maximum for its 529 college savings plan.
- ABLE accounts can work in tandem with special needs trusts.
In summary, the ABLE Act provides more financial independence and security for Americans with disabilities by letting them save and invest without losing critical public benefits. Opening an ABLE account can be an important part of future planning.
How does an ABLE account work?
An ABLE Account allows people with disabilities to save and invest money without losing eligibility for certain public benefits programs like Medicaid and Supplemental Security Income (SSI).
Some key things to know about how an ABLE account works:
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The money in an ABLE account can be used to pay for qualified disability expenses like housing, transportation, education, assistive technology, health and wellness costs, financial management, legal fees, and more.
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There is an annual contribution limit, which is tied to the federal gift tax exclusion amount ($16,000 in 2023). Additional contributions up to the lesser of the federal poverty line or the individual's compensation can also be made by working ABLE account beneficiaries.
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Total account balances are limited to the state's limit for 529 college savings plan accounts. When the account exceeds $100,000, SSI payments are suspended until the account falls back below $100,000. Medicaid eligibility is not impacted at any account balance.
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Earnings in an ABLE account are tax-free if used to pay qualified disability expenses. Tax-free rollovers and transfers are also allowed between ABLE accounts for the same beneficiary or certain family members.
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ABLE accounts are established by individual states, with options then available to people nationwide. Each state sets its own rules around eligibility, investment options, fees, and more.
In summary, an ABLE account provides a tax-advantaged way for people with disabilities to save and pay for disability-related expenses without losing eligibility for certain public benefits programs. Contribution limits, account balance limits, and qualified use of funds apply.
What is the Able Age Adjustment Act 331 and HR 1219?
The Able Age Adjustment Act 331 and HR 1219 are proposed bills that would expand eligibility for ABLE accounts. ABLE accounts allow people with disabilities to save and invest money without losing needs-based government benefits.
Under current law, ABLE accounts are only available to people whose disability began before age 26. The Able Age Adjustment Act 331 and HR 1219 would raise the age limit to 46 years old. This means more people with disabilities would qualify to open ABLE accounts and take advantage of the tax benefits.
Specifically, the bills would impact eligibility for the California ABLE Act program (CalABLE). By raising the age limit to 46, more Californians with disabilities could open CalABLE accounts to save and invest for disability-related expenses.
In summary, the Able Age Adjustment Act 331 and HR 1219 aim to expand access to ABLE accounts by increasing the age limit. This change would allow more people with disabilities to save and prepare financially while maintaining eligibility for supplemental benefits.
Eligibility Criteria for Opening ABLE Accounts
To be eligible to open an ABLE account, an individual must meet certain disability, age of onset, and residency requirements.
Disability Determination by Social Security Administration
To qualify for an ABLE account, an individual must have a disability that began before age 26. Acceptable proof of a qualifying disability includes:
- A positive determination letter from the Social Security Administration for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI)
- A disability certification signed by a licensed physician
Without proof of a qualifying disability, an individual cannot open an ABLE account.
Age of Onset and ABLE Account Eligibility
In addition to having a disability, an individual must have had the onset of their disability before age 26 in order to be eligible to open an ABLE account.
If the onset of an individual's disability occurred after they turned 26 years old, they do not qualify for an ABLE account. The age of disability onset is a strict requirement for ABLE eligibility.
U.S. Residency Status for Account Holders
To open an ABLE account, an individual must be a U.S. resident. This includes U.S. citizens as well as documented immigrants residing in the United States.
Undocumented immigrants without a green card or visa do not qualify for an ABLE account. Residency status is verified when opening an ABLE account.
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Funding and Contribution Rules for ABLE Accounts
Annual Contribution Limits and Gift Tax Exclusion
The ABLE Act sets an annual contribution limit of $16,000 per year from all sources, which aligns with the annual gift tax exclusion amount. This limit may be periodically adjusted for inflation. Contributions up to this limit qualify for the gift tax exclusion.
Account Balance and Individual Resource Limit
ABLE accounts have an individual resource limit of $100,000. If the account balance exceeds this limit, the beneficiary's eligibility for Supplemental Security Income (SSI) payments may be impacted. Account owners should monitor their account balance and contribution levels carefully to remain below the limit if receiving SSI benefits.
Diverse Funding Sources for ABLE Plans
Funds contributed to an ABLE account can come from multiple sources, including:
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The account beneficiary themselves through wages, cash gifts, inheritances, court settlements, etc.
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Parents, grandparents, friends - anyone can contribute cash gifts up to the annual limit.
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Special needs trusts and 529 college savings plans can also transfer funds into an ABLE account through a tax-free rollover.
This flexibility allows account owners to fund their ABLE plan through diverse sources like employment income, family support, and existing dedicated savings plans.
Managing Qualified Disability Expenses with ABLE Accounts
ABLE accounts can be used to pay for a wide range of disability-related expenses to help improve quality of life for people with disabilities. Understanding what constitutes a "qualified disability expense" is key to getting the most out of these tax-advantaged savings accounts.
Housing and Shelter-Related Expenses
ABLE funds may be used to cover costs related to housing and shelter for people with disabilities, including:
- Rent and mortgage payments
- Property taxes
- Home modifications like ramps, widened hallways and doorways, accessible kitchens and bathrooms
Transportation Needs and ABLE Funds
Transportation costs are commonly covered by ABLE accounts, such as:
- Vehicle purchase and modifications
- Transit services like accessible taxis and rideshares
- Transportation related services for accessing medical care, school, work, etc.
Health and Wellness: Utilizing ABLE for Medical Costs
Many ongoing medical expenses can be paid from an ABLE account, including:
- Health insurance premiums and copays
- Assistive equipment and technologies
- Physical, occupational, and speech therapy
- Attendant care, respite care, service animals
- Vision, hearing, and dental care
Education and Employment Support Expenses
ABLE funds may cover costs related to gaining education and employment for people with disabilities:
- Tuition, books, supplies for higher education
- Vocational and life skills training
- Job coaching, resume writing, interview prep services
- Assistive tech and services for gaining/maintaining employment
Miscellaneous Qualified Disability Expenses
Other common qualified expenses paid through ABLE accounts include:
- Financial management and oversight services
- Legal fees for oversight and management
- Funeral and burial costs
- Basic living expenses like food, clothing, transportation
Understanding the flexible usage of ABLE accounts can help people with disabilities improve their quality of life.
Investment Strategies for Growing ABLE Account Funds
Making Informed Investment Decisions
ABLE account owners or their legal representatives control how assets are invested based on individual needs and risk tolerance. As with 529 college savings plans, ABLE accounts offer different investment options to grow funds over time. Account owners can select conservative options like money market funds or certificates of deposit for stable, low-risk growth. More aggressive options are also available, such as stock and bond mutual funds, for those seeking potentially higher returns despite more volatility. Investors must weigh risk versus reward based on their situation.
Investment Vehicles Available in ABLE Plans
States structure their ABLE plans to allow various investment vehicles permitted by federal law, including:
- Mutual funds
- Stocks
- Bonds
- Bank products like CDs
- Annuities
- Insurance products
These options provide account owners flexibility to invest based on their needs and goals. More conservative choices preserve capital while more aggressive ones pursue growth.
Similarities Between 529 Savings Plan and ABLE Investments
There are similarities in how states structure investments within 529 college savings plans and ABLE accounts. In both cases, account owners can select from investment portfolios aligned to their risk tolerance and investment timeline horizons. These options help grow savings to sufficiently fund future disability expenses or education costs. While funds in 529 plans must go toward qualifying higher education expenses, ABLE accounts can fund a broader range of disability-related expenses.
Selecting the Right ABLE Account Provider and Plan
Choosing Among Various State ABLE Plans
Most states have established their own ABLE plans that state residents can participate in. Each state sets specific requirements and restrictions for eligibility, minimum and maximum annual contributions, investment options, fees, and tax implications. Some key factors to consider when selecting a state ABLE plan include:
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Residency Requirements: Some state plans limit enrollment to only state residents, while others allow out-of-state participants.
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Contribution Limits: Annual contribution limits range from $15,000 to $16,000 depending on the state. Account maximums also vary.
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Investment Options: ABLE plans offer conservative investment options like FDIC-insured savings accounts and certificates of deposit, along with more aggressive options like stocks and bonds.
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Fees: Account maintenance fees, investment management fees, and administration fees vary across state ABLE plans. Compare total costs.
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Tax Advantages: Understand if the plan's investment earnings are exempt from state income tax in addition to federal income tax.
Research the ABLE plan options in your state or states you may qualify for based on residency requirements. Compare features, limitations, and total costs to find the right fit.
National ABLE Alliance Program: A Multi-State Option
For U.S. citizens and legal residents who do not qualify for their own state's ABLE plan, the National ABLE Alliance provides a multi-state ABLE option. With a National ABLE Alliance Plan, people can enroll regardless of where they live if their state doesn't offer an ABLE plan or their state plan imposes eligibility restrictions they don't meet. These plans offer consistent features nationwide, including:
- No residency requirements
- $16,000 maximum annual contributions
- Account cap of $500,000
- Variety of investment options
- Annual account fee of $45
The National ABLE Alliance aims to provide nationwide coverage and standardized ABLE offerings for those unable to open accounts through state programs. Compare costs and features to determine if a National ABLE Alliance Plan makes sense instead of a state-based option.
Tax Benefits and Implications for ABLE Account Holders
Federal Income Tax Benefits and 529 Plan Parallels
The ABLE Act provides beneficial federal income tax treatments for ABLE accounts that are similar to 529 college savings plans. Earnings on investments in ABLE accounts grow tax-deferred, meaning no taxes are owed on interest, dividends or capital gains while the funds stay in the account. Qualified withdrawals used to pay for qualified disability expenses are also tax-free at the federal level. This parallels the tax advantages of 529 plans.
However, there are contribution limits to ABLE accounts based on the account holder's disability status and state of residence. In 2023, the annual contribution limit is $16,000 and the account limit is typically $500,000. Certain employed ABLE account holders may contribute above the limit to their account.
State Income Taxes and ABLE Account Contributions
While the federal government provides tax-deferred growth and tax-free withdrawals on earnings and contributions from ABLE accounts, states can also offer tax benefits. Many states mirror the federal tax benefits, exempting qualified withdrawals and earnings growth from state income tax.
Additionally, over 30 states provide a state income tax deduction or credit for contributions made to an ABLE account. The amount of the deduction or credit, along with eligibility rules, varies by state. Account holders should consult their state's ABLE program details or tax documents.
Tax Deductions, Credits, and ABLE Accounts
ABLE account holders can still claim tax deductions and credits they qualify for, like the Earned Income Tax Credit and Medical Expense Deduction. Up to $100,000 in ABLE account assets are disregarded in determining eligibility for means-tested federal programs like SSI and Medicaid.
Distributions used to pay for qualified disability expenses aren't subject to federal gift or estate tax. While contributions aren't tax deductible like 401ks or IRAs, the Saver's Credit may be available for eligible ABLE account holders.
Interaction Between ABLE Accounts and Federal Assistance Programs
The Achieving a Better Life Experience (ABLE) Act allows individuals with disabilities to open tax-advantaged savings accounts without impacting eligibility for certain public benefits programs. ABLE accounts provide additional financial flexibility while protecting access to vital support services.
Protecting Supplemental Security Income with ABLE Accounts
The ABLE Act protects SSI eligibility as long as ABLE account balances remain below $100,000. SSI cash benefits are suspended when the account balance exceeds $100,000, but Medicaid coverage continues unaffected regardless of account balance. ABLE account funds spent on qualified disability expenses do not count toward SSI resource limits.
Account Balance Over $100,000: SSI Implications
If an ABLE account balance grows beyond $100,000, the beneficiary's SSI cash benefit is suspended but Medicaid coverage remains intact. The suspension lasts until excess funds are spent down below $100,000. To avoid suspension, some ABLE account owners keep balances below $100,000 through regular qualified expense spending.
ABLE Accounts Versus Special Needs Trusts
Like special needs trusts, ABLE accounts shelter assets from impacting needs-based benefits eligibility. But ABLE accounts offer more flexibility and control for the beneficiary. Special needs trusts also avoid SSI suspension at higher balances but require a trustee and have stricter rules. For many disability saving needs, ABLE accounts provide simpler options without sacrificing eligibility protections.
Conclusion: Embracing the Benefits of ABLE Accounts
Recap of ABLE Act Goals and Advantages
The ABLE Act was passed to help individuals with disabilities and their families save money for disability-related expenses without losing eligibility for certain assistance programs like Medicaid and Supplemental Security Income (SSI). Key goals and advantages of ABLE accounts include:
- Providing tax-advantaged savings and investment accounts to pay for disability expenses
- Assets in ABLE accounts generally don't affect SSI eligibility or payment amounts
- Funds can be used flexibly for qualified disability expenses like education, housing, transportation, healthcare, and more
- Accounts can be opened by eligible individuals with disabilities or other authorized people on their behalf
Review of ABLE Account Features and Provisions
Some key components of ABLE account regulations include:
- Eligibility based on disability onset before age 26 and SSI/SSDI eligibility requirements
- Annual contribution limits based on annual gift tax exclusion amount
- Total account balance limits tied to individual state limits
- Tax-free earnings growth if used for qualified disability expenses
- Medicaid payback provisions upon account beneficiary's death
- Investment options and use of debit cards for qualified purchases
Strategic Considerations for ABLE Account Use
As part of disability financial planning, individuals should consider factors like:
- Account ownership structures and succession planning options
- Integration with other planning tools like special needs trusts
- State program rules, investment choices, fees, and account balance limits
- Usage for near-term disability expenses versus long-term savings
Careful analysis of individual disability needs and resources can help maximize ABLE accounts as part of holistic planning.
