ABLE Accounts – What Are They? Do You Qualify?

ABLE Accounts – What Are They? Do You Qualify?

An Achieving a Better Life Experience (ABLE) account provides a tax-advantaged method to save for disability-related expenses. Earnings in an ABLE account are not subject to federal income tax and, in most cases, state income tax as long as the withdrawals are used for qualified disability expenses.

About 1 in 4 adults in America have a physical or mental disability, which can result in financial instability and difficulty working. Bankrate created a guide that informs taxpayers on how to accumulate savings for people with disabilities addressing:

• How to save money without impacting benefit asset limits
• Ways to ensure a financially secure future
• Savings accounts for individuals with disabilities

Legislative History

The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Additionally the Tax Cut and Jobs Act of 2017 (TCJA):

• Increases the amount of contributions allowed to an ABLE account and adds special rules for the increased contribution limit.
• Allows an ABLE account’s designated beneficiary to claim the saver’s credit for contributions to the account.
• Allows rollovers in limited amounts from a 529 qualified tuition program account of the designated beneficiary to the ABLE account of the designated beneficiary or his or her family member.

Contribution Limits

In addition to the annual limit of $15,000, a designated beneficiary who works may also contribute his or her compensation up to the poverty line amount for a one-person household. A designated beneficiary however can NOT contribute this additional amount if his or her employer made a contribution for him or her to either a:

• 401(a) defined contribution plan
• 403(b) annuity contract
• 457(b) eligible deferred compensation plan

Qualified Disability Expenses

Qualified disability expenses relate to disability or blindness and seek to maintain or improve the beneficiary’s “health, independence, or quality of life” and include: education, housing, transportation, employment training and support, assistive technology, personal support services, health, prevention and wellness, financial management, administrative services, legal fees, expenses for oversight and monitoring, and funeral/burial expenses.

What To Look Out For

If you withdraw money from an ABLE account and do not use it on a qualified disability expense, the funds generally will be subject to income tax and an additional 10% federal tax penalty on the earnings portion of your withdrawal.

Some states may offer state income tax or other benefits for contributions to an ABLE account. However, these benefits may be limited to contributions to an ABLE account in the plan sponsored by the contributor’s home state. Some transactions may have state income tax consequences.

Any age individual may hold an ABLE account, the beneficiary of the account-the account holder-must have incurred a qualifying blindness or disability before turning 26 years old.

According to the SEC’s Office of Investor Education and Advocacy’s Investor Bulletin to educate investors about ABLE accounts we know the following:

• Contributions are not tax deductible for federal income tax purposes, but your investments can grow tax free and remain so when withdrawn and used for disability-related expenses.
• Similar to 529 college-savings plans, ABLE programs are administered by the states.
• Many states have established ABLE programs and you may have the option to choose your own state’s plan.
• As with 529 plans, you can typically choose among several investment options with an ABLE account, which often include mutual funds and money market funds.
• You may also be able to allocate funds to savings or checking options and access account funds via checks or ATMs.
• Any age individual may hold an ABLE account, the beneficiary of the account-the account holder-must have incurred a qualifying blindness or disability before becoming 26 years old.
• The beneficiary’s parent, guardian, or an individual with power of attorney for the beneficiary may open the account on the beneficiary’s behalf.
• Annual contributions to a single ABLE account are limited to the annual gift tax exclusion (currently $14,000 for 2017).
• ABLE accounts are subject to the same aggregate limit that applies to the state’s 529 plan. These aggregate limits vary from state to state.
• Under current federal law, an account holder is only permitted to change his or her investment selections twice per year.
• It is important to understand the fees and expenses associated with an ABLE account because they may lower your investment returns.
• ABLE programs may charge account maintenance and service fees.
• Some state plans will waive or reduce some of these fees if you maintain a specified account balance, choose electronic delivery of statements, or reside in the state sponsoring the ABLE account.
• You may also be charged asset management fees. Each investment option will typically bear a portfolio-weighted average of the fees and expenses of the mutual funds and other investments in which it invests.

Does having an ABLE account impact eligibility for other benefits?

1. Contributions from third parties to an ABLE account, qualified rollovers from other ABLE accounts, withdrawals for qualified disability expenses, and assets in an ABLE account are generally disregarded for the purposes of means-tested federal benefits.
2. For the purposes of determining eligibility for Supplemental Security Income, ABLE account balances over $100,000 are included as resources of the individual.
3. Qualified distributions from ABLE accounts for housing expenses count toward means-testing for federal benefits.
4. While some states note explicitly that ABLE account assets and income do not affect eligibility for state benefits, you should seek more information from the state on any potential impact.
5. Upon the death of the beneficiary, any state may make a claim against remaining funds in the account for Medicaid benefits received by the beneficiary.

What questions should you ask?

• What fees are charged by the plan?
• Under what circumstances does the plan waive or reduce certain fees?
• What is the minimum amount needed to open an account under the plan and what is the minimum for subsequent contributions?
• What is the aggregate limit on account value?
• Does the plan offer withdrawal methods such as checks, a debit card, or a recurring prescheduled withdrawal?
• What restrictions apply to withdrawals?
• What types of investment or savings options are offered by the plan?
• How long are contributions held before being invested or available for withdrawal?
• Does the plan offer special benefits for state residents?
• Would I be better off investing in my state’s plan or another plan?
• Does my state’s plan offer tax advantages or other benefits for investment in the plan it sponsors?
• If my state’s plan charges higher fees than another state’s plan, do the tax advantages or other benefits offered by my state outweigh the benefit of investing in another state’s less expensive plan?
• Who is the program manager?
• When does the program manager’s current management contract expire?
• How have investment options under the plan performed in the past, knowing that historical results are not indicative of future performance?

The National Disability Institute created The Able National Resource Center, which provides links to most state programs.

For more information on ABLE accounts – What Are They? Do You Qualify, see Publication 907, Tax Highlights for Persons With Disabilities and/or contact me.