The following article is presented for informational purposes only.
While a temporary or permanent disability can lead to physical and financial challenges, a tax-advantaged ABLE account could give you, or a loved one, more options when it comes to managing money.
Achieving a Better Life Experience (ABLE) accounts were first introduced in 2014, and several subsequent changes expanded people’s access to ABLE accounts and the potential benefits of using one of these accounts.
If you have or know someone who has a disability, learn about how ABLE accounts work and why opening an ABLE account could be a good idea.
how ABLE accounts work
Here are a few of the basics:
Savings and Investment Income May Not Be Taxed
An ABLE account is a tax-advantaged savings account, similar to 529 college savings accounts. You can open an account for yourself or someone else, but each person may only have one ABLE account to his or her name.
You Must Meet the Eligibility Criteria
To qualify for an account, your disability must have first onset before you turned 26 years old (you can be older than 26 now). Additionally, you must be receiving SSI or SSDI benefits, or get a letter of certification from your doctor and have severe functional limitations.
You Can Open an Account in Another State
States sponsor ABLE accounts, but you don’t necessarily need to be a resident of a state to open an ABLE account from that state.
There are Contribution Limits
Anyone can contribute to a person’s ABLE account, but the total contributions for the year can’t exceed $15,000 (the limit may change in the future). One exception is for ABLE account owners who also work. In that case, the account owner may be able to make additional contributions beyond the $15,000 per year. The additional amount varies depending on the person’s income, state of residence, and the federal poverty line in that state.
Contributions May Be Eligible for a State Income Tax Deduction
The money you contribute to the account could lead to a state income tax deduction. Any investment earnings you make can be withdrawn tax-free if you use the money for a qualified disability expense.
If you no longer qualify for an ABLE account, you can keep the account open in case the disability returns. The contributions can be withdrawn federal income tax-free (you already paid taxes on the money), although you may need to declare and pay taxes, plus a 10 percent penalty, on any investment earnings you withdraw and use on a non-qualified expense.
Advantages of ABLE Accounts
The main benefits that ABLE accounts offer are potential tax savings and the ability for someone with disabilities to build assets. The latter could be especially important if you have a child with a disability and want to start saving for him or her, if you expect to be disabled in the future, or if you’re disabled and want to work, but fear losing access to government benefits.
Build Assets Without Losing Eligibility for Public Benefits
Some government benefit programs, including subsidized health care, housing assistance, and Supplemental Security Income (SSI) are available to people with disabilities. However, eligibility could be limited based on your assets. For example, a single people may not qualify for SSI if they have $2,000 or more worth of assets. The limit only increases to $3,000 for a married person.
The first $100,000 in savings in an ABLE account don’t count toward the SSI asset limit. As a result, someone with a disability can build savings without having to worry about being disqualified for the benefit.
Tax-Free Savings and Withdrawals
ABLE accounts also offer several potential tax benefits.
Although there’s no federal tax deduction, some states let you claim a deduction from state income taxes for your contributions to an ABLE account. Ideally, you can invest your savings and grow your money within the account.
You can then withdraw money to pay for qualified disability expenses without having to pay federal income tax on any of the funds (potentially saving you from paying taxes on investment earnings). There’s a fairly broad definition of what qualifies, and housing, education, transportation, and even job training may all count towards tax-free withdrawals.
Additionally, as of 2017 (and through at least 2025), contributions into your ABLE account could qualify you for the Saver’s Credit. If you’re at least 18 years old, aren’t a full-time student, and aren’t a dependent on another person’s tax return, you may be eligible for a tax credit that’s worth up to $1,000 if you make at least $2,000 in contributions.
Opening an ABLE account
You can open an ABLE account for yourself, or someone may be able to open an account for you after you grant that person power of attorney. In either case, the person with disabilities will be the account’s beneficiary and owner.
Also, if the person with disabilities is already the beneficiary of a 529 college savings plan (or the family member of a beneficiary), the money in the account can be rolled over into an ABLE account. Any funds rolled over in this way count towards the $15,000 annual limit.
Dozens of states offer ABLE accounts, and while they all serve similar purposes, there may be slight differences to consider. For example, the investment options and fees can vary depending on the program, and only some states’ accounts come with a debit card. Additionally, some states don’t allow out-of-state enrollees.
The ABLE National Resource Center, a nonprofit organization founded by the National Disability Institute, has a tool you can use to compare states’ programs. Once you identify the account you want to open and verify that you qualify, you can usually complete the process online.
If you think an ABLE account might help you, or be a good option for someone you know, learn more about the accounts and how they work. The ABLE National Resource Center has a lot of information, and many states have set up websites with general information about ABLE accounts and specific details about their state programs.