Maybe College, Maybe Not: ABLE Accounts Allow Flexibility for Disabled Americans
One of the newest financial products around, 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.
Why Open an ABLE account?
The 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 Though you can’t deduct your contribution, the money grows without being taxed and is not taxed when it’s withdrawn for approved college expenses, notably tuition.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, state and federal assistance programs can make it difficult to achieve financial independence. For example, in order to gain access to Supplemental Security Income benefits you are generally 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.
Benefits programs aimed at people who meet the income requirement — and that’s usually low income — are referred to as “means tested.” Qualification is based on the applicant’s means. These types of programs 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 federal 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. Depending on your state of residence and the state that issued your ABLE account, you might not have to pay state taxes on the interest, either.
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,” says Paul Curley, Director of 529 & ABLE Research at ISS Market Intelligence.
He says that you should check your state laws to review any potential state tax benefits associated with ABLE programs, including tax parity.
It is important to note that there is a caveat to all this tax savings, both for state and federal income tax: It only applies if you withdraw funds for qualified disability expenses.
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
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.
Legislative Efforts to Expand Eligibility
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. Because of these facts, there are legislative efforts in the works to up the age.
The standard annual contribution limit for an ABLE account is $15,000. 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 according to the Internal Revenue Service. In 2021, that means on top of the standard $15,000 contribution limit, eligible individual residents of the 48 contiguous states could contribute an additional $12,880 from their work earnings. That makes the maximum total annual contributions $27,880 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,” says Curley.
Avoiding Medicaid Payback
When the beneficiary dies, any funds remaining in an ABLE account balance can be used for burial expenses. In many states, any remaining balance in the beneficiary’s ABLE account after accounting for burial expenses will be paid to the state to reimburse the costs of Medicaid.
Compare at the ABLE National Resource Center
Over 40 states 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 and your child, you’ll want to consider any state tax benefit, Medicaid payback rules at the state level that require reimbursement of some payments after death, 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.”
If you want an easy way to compare plans and save money on fees across state lines, you can use a resource such as the ABLE National Resource Center.
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.