One of the most important developments in special needs planning was the Achieving a Better Life Experience Act of 2014, which created ABLE accounts. These tax-advantaged accounts, which have become more widely available in the past few years, are a valuable way for people with disabilities to build their own savings without affecting their eligibility for government benefits.
Whether you have a child with special needs or you’re an adult of any age who developed a qualifying disability before age 26, you can benefit from saving in an ABLE account — either for current expenses or to build tax-free savings for the future. Here’s how these accounts work, how to make the most of the tax benefits and how to pick a plan.
How ABLE Accounts Work
ABLE accounts are easy to open, and you can usually get started with $50 or less. Similar to 529 college savings plans, they’re offered by the states (now available in 41 states and the District of Columbia), but you can generally invest in any state’s plan. Your contributions may be tax-deductible, depending on the state. You can contribute up to $15,000 per beneficiary in 2020, plus more for disabled people who are working.
Most plans let you invest the money in an FDIC-insured savings account and use it for current expenses, or you can choose from a handful of mutual funds to build up savings for the future. You can then withdraw the money tax-free for qualified disability expenses — with a very broad definition that includes almost anything to benefit the person with the disability. The money in the ABLE doesn’t count toward asset tests for government benefits, such as Medicaid, food assistance (SNAP) and housing assistance programs. Also, up to $100,000 in the ABLE doesn’t count as assets for Supplemental Security Income, or SSI, eligibility, which is usually only available for people with assets of $2,000 or less in their own name.
“The ABLE account is an extraordinary opportunity for people with disabilities who have not had the freedom or flexibility to be able to put money aside in a savings account without fear that the money would count as an asset and violate the means-testing eligibility for a variety of government programs,” says Michael Morris, founder and strategic advisor for the National Disability Institute.
Who Is Eligible for an ABLE Account?
To be eligible for an ABLE account, you need to have developed a qualifying disability before age 26. People who are already receiving benefits under SSI or Social Security Disability Insurance (and whose disability onset was before age 26) are automatically eligible to open an ABLE account. Other people may qualify if they have a letter from a doctor certifying that they meet Social Security’s definition of having “significant functional limitations” with an onset before age 26.
“Even though the age of onset of the disability has to be 26 or younger, we have people all throughout their life span who are utilizing this savings plan,” says David Bell, deputy director of the Oregon Treasury Savings Network, which runs the state’s ABLE and 529 plans. Many of the accounts are opened for children with special needs and are managed by their parents; others are owned by disabled adults of all ages — the oldest Oregon account holder is 87 years old, says Bell.
There’s no income limit to be able to contribute to an ABLE account. Even though you can qualify if you’re eligible for SSI or SSDI, you don’t need to be participating in either program to have an ABLE account. Morris talked with an attorney who is blind and is using the ABLE account as an extra way to build up tax-free savings for the future that he can also use as a back-up emergency fund without an early-withdrawal penalty. “He opened the account on top of his retirement accounts, and he has the flexibility to use the money for the short term or the longer term,” he says.
How Much Can You Contribute to an ABLE Account?
You can contribute up to $15,000 per beneficiary to an ABLE in 2020. The contributions can come from anyone — from the disabled person, their parents, grandparents, friends or family — as long as the total for the year doesn’t exceed the limit. Some plans have gift cards that make it easy for friends and relatives to contribute — and can be a good way for them to give money for birthdays and holidays without risking eligibility for government benefits.
“Even if you can just put in $1,000, you can watch that money grow over time,” says Morris.
You can roll over money from a 529 college savings plan into an ABLE (up to the $15,000 total contribution limit per year), which can be a great option if you’re not sure whether your child will go to college. With the ABLE, they can still use the money tax-free for college if they go, but they have a lot more flexibility to tap the account for other expenses, too.
Also, a new law increases the contribution limit for disabled people who earn money from working. The ABLE to Work law increases the amount they can contribute beyond the $15,000 — they can also contribute their earnings from working, up to the federal poverty level ($12,490 for a one-person household in 2020) if they do not have an employer-sponsored retirement plan at work.
How Can You Use the ABLE Account Money?
You can withdraw the money tax-free from the ABLE for almost anything to benefit the person with the disability. “The definition of qualified disability expenses is virtually anything you need that is going to increase their quality-of-life experience, from transportation, housing, technology assistance, employment supports, continuing education, financial and legal advice,” says Morris.
“It’s meant to be a broad definition because they really want to help individuals achieve that better life experience,” says Alexandria Nadworny, a certified financial planner and wealth advisor with Affinia Financial Group in Burlington, Massachusetts. Her brother James, who was born with Down syndrome, does custodial work and recycling at local offices and contributes some of his earnings to the Massachusetts ABLE plan, which is administered by Fidelity.
You can use the money for expenses over the short term — and many plans have a debit card or prepaid card that makes it easy to spend the money — or invest it over several years and use it for long-term goals. Morris says that about three-quarters of the account owners keep the money growing in the account for the future. “They’re saving for much longer financial goals, which is very exciting,” says Morris. “Many people tell us with their ABLE accounts their dream is to own a home of their own.” He’s talked with people who have used the ABLE money for a wide variety of expenses — including a young woman with Down syndrome who used money from her ABLE account to help pay for college in a customized program for individuals with intellectual and developmental disabilities, and another young woman who was saving to go to medical school.
You don’t need to provide the plan with evidence of the eligible expense when you withdraw the money from the ABLE account, but you should keep records of the expenses in your tax files if you’re ever audited.
How to Choose an ABLE Account
ABLE accounts are now offered in 41 states and the District of Columbia. Most states let residents of any state open an account (although a few, such as Florida, are only open to their own residents). You can only have one ABLE account per person, but you can switch from one plan to another. You can generally open an account with as little as $25, says Paul Curley, director of savings research for ISS Market Intelligence, a research firm that gathers data on ABLE and 529 plans. Some plans have no annual fees; others have monthly account maintenance fees (such as $2 per month), he says.
You may get a state income-tax deduction or tax credit if you contribute to your own state’s plan. About 18 states offer an in-state tax deduction or incentive for residents to contribute to ABLE accounts, says Curley. Oregon residents, for example, can get a refundable tax credit for contributing to an account with a beneficiary under the age of 21. The credit is worth up to $300 per year for joint filers or $150 for single filers, with the larger credit for people with lower income. Some states also charge lower fees for their own residents than they do for residents of other states.
Find out about the investing options. Most plans offer a money market account for short-term savings, and also let you choose from a handful of mutual fund portfolios based on different risk levels — five investment options is most common, says Curley. The Oregon plan, for example, offers an FDIC-insured savings account as well as a conservative, moderate and aggressive portfolio, consisting primarily of Vanguard funds. Fidelity manages the Massachusetts Attainable Savings Plan, which is available to people in any state, and offers eight portfolios of Fidelity funds.
You can compare features for each state’s plan through the ABLE National Resource Center’s website, which is also filled with information about ABLE accounts and will have extra resources available every day in August for Able to Save month.
[See: 35 Ways to Save Money.]
Do You Need an ABLE if You Have a Special Needs Trust?
Many families who have children with special needs already have a special needs trust, and wonder whether they should still contribute to an ABLE. The two financial tools serve different purposes, says John Nadworny, a certified financial planner and partner with Affinia Financial Group.
“An ABLE account is a savings vehicle, and a special needs trust is an estate planning tool,” he says. The ABLE lets the disabled individual save for current expenses or future needs, while the special needs trust provides planning for when a parent dies, he says. The special needs trust may be funded by life insurance and other assets from the estate that can help support the disabled child through his or her lifetime after the parents die without jeopardizing eligibility for government benefits.
It helps to work with a financial planner who focuses on special needs planning and can figure out how both types of tools can work within your financial and estate plans. There are several resources to help you find financial advisors and estate planning attorneys who are experts in special needs planning, says Cynthia Haddad, a certified financial planner and partner with the Affinia Financial Group. She recommends finding specialists through the Academy of Special Needs Planners and the Special Needs Alliance. You can also look for someone who holds a Chartered Special Needs Consultant designation from the American College of Financial Services.
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