Everything You Need to Know About ABLE Accounts for Disabled Americans
ABLE accounts are a 529 account with all kinds of bells and whistles built specifically to serve disabled Americans.
After years of grassroots advocacy efforts from the disability community, ABLE accounts were birthed into legislation in December 2014. And thanks to legislation passed in late 2022, more people will become eligible for it soon (more on that in a bit).
Why Open an ABLE Account?
529 accounts are traditionally state-sponsored and used to save for your child’s college education. Though you can’t deduct your contribution, the money grows without being taxed and is not taxed when it’s withdrawn for approved college expenses, notably tuition.
If you are the parent of a disabled child, their future in higher education may be unclear. However, an ABLE account allows you to save or invest money for a potential university experience, but the funds can also be used for a myriad of other life expenses.
Outside of saving for college, there are several reasons both disabled individuals or parents of disabled children may want to open an ABLE account.
Asset Tests: Supplemental Security Income and Beyond
When you are disabled, the system can make it difficult to achieve financial independence. For example, in order to gain access to meager amounts of Supplemental Security Income benefits you are only allowed to have $2,000 in assets. The SSI resource limit is $3,000 for couples. Assets can include the value of your bank account, second vehicle, life insurance policies, cash on hand and more.
Asset tests make it nearly impossible for individuals and families to save money because they can be disqualified when savings reach a certain level. Asset limits are especially problematic for disabled individuals living near or below the poverty line, as they are more likely to need extra savings for more frequent medical financial emergencies.
Other Income-Based Public Benefits
SSI is not the only means-tested public benefits program. Many states may have an asset limit associated with Medical Assistance or Medicare access when you’re disabled. There are various other benefits you may need to access that come with asset tests, too.
ABLE accounts solve this problem across many programs. The first $100,000 you have saved in an ABLE account cannot be counted for SSI benefits. Any amount saved in an ABLE account cannot be counted towards asset tests for almost all other federally-funded, means-tested benefits — like Medicaid.
ABLE accounts can function as tax-advantaged savings accounts or as a vehicle for investing. The interest earned in your ABLE account is not taxable for federal income tax purposes – as long as it’s withdrawn for qualified disability expenses.
The only way contributions help your federal tax return is if the contribution is made by the account owner themselves. Through 2025, you can count contributions towards the Saver’s Credit in this instance.
SECURE 2.0 does replace the Saver’s Credit with a Saver’s Match for qualified retirement accounts effective in 2027, but ABLE accounts were not included in the legislation. Unless there is further legislation, this tax advantage will disappear after 2025.
While the federal government doesn’t give you much credit for ABLE contributions, some states do. For example, Pennsylvania and Mississippi allow you to deduct each and every dollar contributed to an ABLE account on your state tax return.
Look for Tax Parity
In some states, you can avoid the state tax burden on ABLE accounts even if you purchase from out-of-state ABLE programs.
“Pennsylvania provides residents with ‘tax parity,’ which allows those to purchase an ABLE plan across state lines while maintaining Pennsylvania state-tax advantages,” said Paul Curley, Director of 529 & ABLE Research at ISS Market Intelligence.
He said that you should check your state laws to review any potential state tax benefits associated with ABLE programs, including tax parity.
What Are Qualified Disability Expenses?
With a traditional 529 account, interest isn’t taxable as long as you are using your withdrawals for qualified expenses related to higher education — or in some rare cases, K-12 education.
ABLE accounts are different. While you can use the money saved in this account for higher education, the list of qualified disability expenses is much more robust. Almost anything related to the disabled person’s life counts as a qualified disability expense with an ABLE account, including but not limited to:
- Housing costs
- Employment training and support
- Assistive technology
- Personal support services
- Health care expenses
- Prevention and wellness
- Financial management services
- Administrative services
- Legal fees
- Burial expenses
- Other basic living expenses
For a full list of qualified expenses, read the state plan disclosure associated with your ABLE account.
Who Can Open an ABLE Account?
Currently, you are eligible to open your own ABLE account if you have a disability certification from the Social Security Administration, and you were under age 26 at the time of onset. You can also open an ABLE account on behalf of your disabled child if they meet these same requirements.
The eligible individual does not have to be receiving Supplemental Security Income (SSI) or any other benefits in order to qualify.
Expanded Eligibility in 2026 and Beyond
The age requirement for ABLE accounts is problematic, as many disabilities don’t present until later in life. In addition, 25% of American adults become disabled between age 20 and traditional retirement age.
After years of advocacy work, the ABLE Age Adjustment Act passed as a part of SECURE 2.0 in late 2022. This new provision will allow individuals to open an account as long as the onset of disability happened before their 46th birthday. This change will not go into effect until 2026, but it will expand eligibility to an estimated 6 million new potential account holders.
The fact that more people can open accounts has more downstream effects than just altruism. Many states had private companies set up their ABLE account programs over the past several years with private funds. To recoup the costs of setting up and managing these plans, there are fees associated with ABLE accounts. These fees vary by state.
The expansion of the eligibility pool from 8 million to approximately 14 million eligible people could mean lower fees on these accounts in the future, according to JJ Hanley, Director of IL ABLE.
“We know that with more people opening accounts, the program managers can recoup their investments more quickly and can lower their fees over time,” she said.
Hanley notes that you might not have to wait until 2026 to see lower fees. While the expanded eligibility pool will certainly help speed things along, state administrators participating in the National ABLE Alliance – which includes 18 different states’ ABLE programs including Illinois – recently renegotiated their contract with private sector program managers to lower fees for consumers independent of the new eligibility expansion.
The standard annual contribution limit for an ABLE account is $17,000. Anyone can contribute towards this max — the disabled individual, family members, friends, etc.
ABLE to Work
Until 2025, disabled adults who work are allowed to nearly double their contributions to ABLE accounts through the ABLE to Work Act.
Any income from your job can be set aside in an ABLE account up to the federal poverty line amount. In 2023, that means on top of the standard $17,000 contribution limit, eligible individual residents of the 48 contiguous states could contribute an additional $14,580 from their work earnings. That makes the maximum total annual contributions $31,580 in most states.
“While ABLE to Work is set to sunset in 2025, a number of advocates and stakeholders are focused on extending the ABLE to Work provision,” Curley said.
Avoiding Medicaid Payback
When the beneficiary dies, any funds remaining in an ABLE account balance can be used for outstanding disability and burial expenses. Any remaining balance in the beneficiary’s ABLE account after accounting for outstanding disability expenses and burial expenses may have to be paid to the state to reimburse the costs of Medicaid.
Legislative Efforts to Remove Medicaid Payback Provisions
Medicaid payback provisions are one of the key factors that keep people from opening ABLE accounts, but Hanley encourages them to reconsider their reservations.
First, many states have passed protective laws limiting when Medicaid can and can’t claim any remaining funds. But these bans can only be placed on certain programs, and people who have ABLE accounts typically rely on Medicaid programs that aren’t covered. Even with these state laws, there are still instances where Federal law can compel them to collect.
Hanley said that some – though not all – states will run a cost-benefit analysis on recuperating these funds. Because these calculations typically reveal that it would be more expensive to pursue the funds than they’re worth, some states have a hands-off policy even within existing law.
Technically, the Federal government can require collection in select circumstances. But to date, it’s been a bigger concern for potential account holders than a practical problem for those who do pass away with an ABLE account. The average account balance is $8,500, which means after outstanding disability and funeral expenses are paid, there’s not much left for the state to recover, anyways.
Although it’s not the biggest practical concern, it is an unjust policy that advocates are working to correct through legislation.
Hanley said the National Association of State Treasurers (NAST) has a list of legislative priorities. The ABLE Age Adjustment Act has topped that list for years, but now that it has passed, they’ll focus their attention on other areas.
“The last time we surveyed state administrators about what to do to improve the program at the federal level after ABLE Age Adjustment, removing the Medicaid recovery requirement topped the list,” Hanley said.
Whether that legislation looks like a total ban on the practice, or safe harbor laws for ABLE program participants remains yet to be seen, but we could reasonably expect something along those lines to make its way to Congress next.
Compare at the ABLE National Resource Center
Forty-six states (plus Washington, D.C.)have their own ABLE programs to date, and you can buy plans across state lines.
As you decide which state’s ABLE accounts are best for you or your child, you’ll want to consider any state tax benefits and fees.
“Most plans have both annual or monthly account maintenance fees as well as investment-related fees,” explains Curley. “Be aware of the total fees when taking both categories into account.”
Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.