In late 2014, after nearly a decade of lobbying from disability advocacy groups, Congress passed the Achieving a Better Life Experience Act, creating a tax-advantaged account for people with disabilities, similar to a 529 plan for college. Money in an ABLE account grows and can be spent tax-free on qualified expenses such as medical treatment, transportation, housing, education and assistive technology.
Prior to the ABLE Act of 2014, Americans with disabilities who had more $2,000 in their name would lose eligibility for government benefits such as Medicaid coverage or Supplemental Security Income (a government program funded by U.S. Treasury general funds that provides stipends to low-income people who are blind, disabled or over age 65). The total annual contribution limit for an ABLE Account is $14,000, in keeping with the federal gift tax exclusion limit.
[Read: 7 Ways to Keep Your Health Care Costs in Check.]
“People with disabilities often have special health care needs that can only be met by the very robust benefits provided under Medicaid,” says Christopher J. Rodriguez, senior public policy advisor at the National Disability Institute. “One of the biggest benefits [of ABLE Accounts] is that it allows individuals to save for their futures without jeopardizing their SSI and Medicaid benefits,” he adds.
Last year, Ohio became the first state to offer ABLE accounts. As of this writing, Florida, Kentucky, Michigan, Nebraska, Ohio, Oregon, Tennessee and Virginia offer ABLE accounts, with programs launching in several states later this year. A consortium of nine states, including Alaska, Illinois, Iowa, Kansas, Minnesota, Missouri, Nevada, Pennsylvania and Rhode Island, are working together to make ABLE Accounts available to the public.
Here’s a look at questions to consider before setting up an ABLE Account.
Do I or does my loved one qualify? The beneficiary of an ABLE Account must have become blind or disabled before age 26 and meet other criteria for documenting a severe disability. This age restriction excludes many people with disabilities, but Rodriguez says it was deemed necessary to the get the ABLE Act passed; a more inclusive program was thought to be too expensive due to lost tax revenue.
The required age of onset may change in the future, however. “There’s lot of activity and support that would take it from [age] 26 to 46,” says Mary Morris, CEO of Virginia529 College Savings Plan, which launched Virginia’s ABLE plan last month. “It’s not supposed to be a Medicare supplement for people who are aging and become disabled because of age alone,” she adds.
[Read: How Family Caregivers Can Ease the Financial Burden.]
Does my home state offer any tax incentives? Like 529 accounts, ABLE Accounts are administered on the state level, but you don’t have to open one in your home state. However, some states offer state income tax incentives to residents, so if yours does, look at your state plan first.
People in states without an ABLE Plan or without state tax incentives should consider plans in other states, says Todd Sensing, founder and CEO of FamilyVest, a fee-only financial planning firm in Florida that advises families with special needs. “Time is always on your side whenever you go into a savings program,” he says. “You want to set up [an account] as early as you can. Most of these can be transferred from one state to another once a year,” he explains.
Sensing has two sons on the autism spectrum, so he plans to set up accounts for his family, but he won’t get a state tax break for doing so because his home state of Florida doesn’t have state income tax. (The Florida plan, called ABLE United, is only open to state residents.)
What fees are associated with the account? Fees vary by state, so it pays to compare costs. For instance, Ohio charges a $2.50 per month maintenance fee to Ohio residents and $5 to residents of other states. In contrast, Virginia’s monthly fee is $3.25 per month regardless of residency, and that fee is waived if you keep an average daily balance of $10,000 in your account. The maintenance fees cover the cost of administering the program, and fees for the underlying investments are an additional cost. Each state’s plan offers different investment choices, so make sure to carefully review low-fee investment options to pick a plan that you’re comfortable with.
What are my needs today and what will my needs be in the future? Sensing suggests thinking about how you’ll use the plan, so you can match the best plan to your needs. For instance, if you’re not planning to use funds right away, then “debit cards and tracking expense type programs probably wouldn’t be the first thing that you need,” he explains. “You may like to have a larger limit or different ways of funding the account,” he says. For instance, “Michigan has a public crowdfunding site that might work well with families that want to integrate friends and family into the savings plan,” he adds.
Those who do need more immediate access to funds might want to choose an ABLE Account with a debit card attached. Virginia is one state offering a debit card to use for eligible purchases. Its plan, called ABLEnow, works similarly to a health savings account, Morris says. “With the HSA structure, you have to start with the checking account component, so $2,000 has to be maintained in the checking account,” she says. “Anything over and above that can be in investment options,” she explains. Participants use the debit card to make purchases directly out of their ABLEnow account rather than filing for reimbursement later, which should streamline payments and record-keeping, Morris says.
[See: 8 Easy Ways to Organize Your Financial Life.]
While ABLE Accounts have the potential to help millions of Americans with disabilities, some people may still choose to set up a special needs trust, sometimes called a supplemental needs trust, or take other planning steps as well. “ABLE is just one tool among a variety of tools that can help an individual with a disability plan for their financial futures,” Rodriguez says. “If you have the means to do so, the benefits of having a special needs trust and an ABLE account combined outweigh having either one individually,” he adds.
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What to Know Before Opening an ABLE Account originally appeared on usnews.com
