ABLE Accounts for Loved Ones with Disabilities

Families with special needs children typically have to plan differently. This usually means more extensive financial planning and working with knowledgeable professionals to create the most effective and long-lasting plan as possible. The Achieving a Better Life Experience (ABLE) account was passed in 2014 and is also known as the 529A savings account because it was modeled after the popular 529 savings plan. However, this is meant to fund qualified “disability needs”. Like 529 plans, ABLE accounts are run by states rather than the federal government.

ABLE accounts address an underpublicized financial need. While some families open college savings accounts, few start discrete savings accounts or trusts for children with disabilities. That difference may be partly due to the presumption that “the money will be there” when the child becomes an adult. The money may not be there; at least, not as much of it as many families hope. State agencies and nonprofit groups helping those with disabilities face ongoing funding challenges, including pressure to limit the “entitlements” they distribute. Social Security, which provides Supplemental Security Income (SSI) to millions of disabled adults, faces its own set of issues.

As an adult, a disabled person becomes eligible for Medicaid and monthly SSI payments, provided they meet the financial requirements, typically only available to those with $2,000 or less in assets. Some special needs adults have more than $2,000 in assets in their name by age 18. Savings accumulate, family gifts and investments are made on behalf of the child, and suddenly, that young person is ineligible for fundamental health care and income benefits.

ABLE accounts address this dilemma. Money accumulated in a tax-advantaged ABLE account does not count toward that $2,000 total. Even if funds in the account exceed $100,000, the account beneficiary will still be eligible for Medicaid. The current account maximums range from $235,000 to $529,000 depending on the state. Not every state has ABLE accounts. If that’s the case for you, consider opening an account in another state. Some states allow out-of-state residents to participate in their ABLE programs. 

The Tax Cuts and Jobs Act of 2017 brought notable changes for these types of accounts. While the basic annual account contribution limit is currently $15,000 for an individual, working ABLE account holders may now contribute employment income to their accounts in excess of that $15,000 threshold, up to the individual federal poverty level set for the preceding calendar year. In addition, some ABLE account beneficiaries may be eligible for the Saver’s Credit, a sizable federal tax break. 

These accounts do have their shortcomings. The biggest issue with ABLE accounts is that they do nothing for people who become disabled after age 26. You cannot open one for someone older than 26 unless the individual became disabled prior to reaching that age. Another little-known drawback: states sponsoring ABLE accounts can seek repayment from those accounts for the cost of care covered by Medicaid if the beneficiary dies.

ABLE account contributions are not tax-deductible at the federal level (some states do permit deductions). This tradeoff is made in exchange for tax-deferred earnings and tax-free withdrawals. Withdrawals go untaxed, so long as the money is spent on “qualified disability expenses,” which can range from education, housing, and transportation costs to job training and health care. Nonqualified withdrawals are taxable.

The bottom line? ABLE accounts give families with children who have special needs a new way to save and invest for future needs and expenses. This account has become an important component of special needs planning. The money in an ABLE account alone may not be enough to cover lifetime care expenses for a disabled adult, even if the account is replenished. An ABLE account is usually not a financial “answer” for families with mentally or physically challenged children, but a part of a greater financial strategy that might include a supplemental needs, trust, or other savings vehicles. To learn more about comprehensive planning, which can include planning for a child with disabilities, click the link below, call 1-800-467-8152, or email to schedule a time to chat.


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