Balancing retirement with special needs planning

How Do ABLE Accounts Work?

"ABLE accounts can be powerful financial tools for those living with a disability. Here's how they work."

It took nearly a decade of lobbying, but in 2014, Congress passed the Achieving a Better Life Experience Act. The law, referred to as ABLE, lets people with disabilities open a tax-advantaged account, similar in many ways to 529 accounts used to help with college funding. ABLE accounts are explained in the article Everything You Need to Know About ABLE Accounts from U.S. News & World Report.

The accounts allow eligible individuals to save money without putting their eligibility for government benefits at risk. The income from the account is not used for means testing for Social Security Income or Medicaid.

However, despite these benefits, ABLE accounts are still not widely used. Less than 57,000 accounts have been opened nationwide. Here’s more information on how they work.

Why would a disabled person want an ABLE account? Living with any type of disability is costly. There are out-of-pocket expenses for transportation, housing, and education that may not be covered by government programs. Those programs limit a person’s assets to $2,000. Prior to the ABLE Act becoming law, that meant that a disabled person could not save money for their own use. While there are limits to the size of ABLE accounts, they provide an opportunity for a financial cushion.

Who is eligible for an ABLE account? A person who became blind or disabled before age 26 may be the beneficiary of an ABLE account. Someone who is receiving SSI or Social Security Disability benefits is automatically eligible to open an account. Others will need to meet Social Security’s definition of being disabled and have a doctor’s letter stating that they are disabled to qualify.

Do all states offer ABLE accounts? There are 42 states, plus the District of Columbia, that offer ABLE Accounts. But a disabled resident of a state that does not offer ABLE accounts can open one with another state’s program. Right now there are 26 states that let anyone open an account, and the rest limit their programs to state residents. An estate planning attorney will know what your state’s rules are.

Are there tax incentives for using an ABLE account? This varies by state. Michigan and Arkansas let single filers deduct $5,000 in contributions to an ABLE account on their state tax forms. For joint filers in these two states, the maximum deduction is $10,000. In Illinois, there is a state income tax deduction of $10,000 for a single filer and $20,000 for joint filers. For Kansas, deductions are smaller; $3,000 for individuals and $6,000 for couples. New York State and California do not allow any deductions.

How much can be contributed to an ABLE account? $15,000 a year is the limit for annual contributions. Be aware that the first $100,000 of an account’s balance is shielded from asset means testing for government programs. Once the account reaches $100,001, it could impact SSI benefits.

What expenses can the ABLE account be used for? The account is designed to be used by people with disabilities, so things like medical treatment, transportation, education, and assistive technology are permitted uses. The expense must be related to a person’s disability.

Does it cost anything to open an ABLE account? This varies by state. In Ohio, you’ll pay $30 to open an account if you are a resident; out of state fees are $42 annually. In New York, only residents can open accounts, and the fee is $45 to open an account online and $55 if it is done on paper by mail.

Should a Special Needs Trust be used instead of an ABLE account? Many families chose a Special Needs Trust instead of an ABLE account. These trusts cost more to setup, but also offer more flexibility. They once were the only option. An estate planning elder law attorney will be able to guide the family as to which is the best solution for their disabled family member.

Reference: U.S. News & World Report (February 18, 2020) Everything You Need to Know About ABLE Accounts

Suggested Key Terms: ABLE Account, Achieving a Better Life Experience Act, Social Security, Means Tested, Special Needs Trust, Disability