Living with a disability can be incredibly expensive. One study published by the National Disability Institute found that households with a disabled adult require an average of 28% more income to maintain the same standard of living as ones without.
To make ends meet, many with disabilities — or those caring for loved ones with one — turn to government programs like Medicaid, Supplemental Nutrition Assistance Program and Supplemental Security Income.
But these benefits come with limits as low as $2,000 regarding how much in liquid assets you can maintain and still be eligible.
Enter the Achieving a Better Life Experience (ABLE) Act, passed by Congress in 2014. This act allowed for the creation of tax-advantaged accounts for people with disabilities that work similarly to 529 plans for college savings. These accounts not only come with tax benefits, the assets in them don’t count against eligibility for government programs.
Read on to learn more about ABLE accounts, including how they work, who is eligible and if opening one might be right for you.
What Is an ABLE Account?
Unfortunately, not many disabled people know about ABLE accounts, which can be one of the easiest and most effective ways to save and pay for disability-related expenses, Patricia Roberts, chief operating officer of Gift of College Inc. and 529 plan expert, says.
“These little-known accounts can be a path to financial independence for eligible individuals with disabilities,” she says.
The ABLE act introduced these accounts under IRS Code 529A to support those with disabilities and help them save for related expenses.
According to Roberts, one of the main drawing points of an ABLE account is that individuals can save without impacting their eligibility for public benefits like SSI. Plus, these accounts come with tax benefits.
[Read: Best Insurance Companies for Medicare Advantage.]
“The accounts grow (like 529 college savings plan accounts) on a tax-deferred basis — meaning as contributions grow in value, the earnings are not taxed — and when withdrawn and used for a wide range of permitted expenses, the earnings are never taxed,” Roberts says.
And to make these accounts even more desirable, approximately 20 states and the District of Columbia have an annual state tax deduction or credit for contributions to them, she says.
Kari Lorz, certified financial education instructor at Money for the Mamas, had her daughter 10 weeks early and set up a 529 plan for her.
“But by the end of year one, it was obvious we were dealing with some serious medical issues” Lorz says. She knew she would need long-term care, so she rolled the 529 into an ABLE account. Her daughter is now 7 and living with cerebral palsy.
“I am so thankful that we have an ABLE set up for her so we can save and invest tax free while still protecting her benefits,” Lorz says.
ABLE Account Eligibility
All ABLE accounts require individuals are diagnosed with a disability or blindness before they reach 26.
Forty-six states and the District of Columbia currently have active ABLE programs.
“Each state runs its own ABLE program, so be sure to check with your state’s program on eligibility. Yet, some states allow out-of-state residents to sign up. So, be sure to check your options,” Lorz says.
For instance, Lorz’s home state of Oregon requires applicants live in the state and have a disability or blindness diagnosis that developed before they turned 26 and that will last — or has lasted — at least a year.
Additionally, an applicant must be eligible for SSI or Social Security Disability Insurance because of their disability — and be able to produce a signed diagnosis from a licensed physician.
The ABLE National Resource Center has a tool on its website that enables you to view state programs and their specific requirements, including whether they accept out-of-state residents.
ABLE Account Changes on the Horizon
Fortunately, for those who have a disability with an onset date older than age 26, Congress made some changes to ABLE qualifications in the last year.
“Thanks to changes made through the ABLE Age Adjustment Act at year end 2022, beginning Jan. 1, 2026, the age of onset of disability is being raised from 26 years old to 46. This makes millions of additional Americans eligible to use ABLE accounts,” Roberts says.
If you’re still not sure if you’ll qualify, take ABLEnow’s eligibility quiz.
ABLE Account Costs
Most ABLE accounts come with account maintenance fees but they vary by state. According to Roberts, however, you can often get started with a deposit as low as $25.
But that’s not the only cost you should account for before opening an ABLE account.
“The costs associated with ABLE accounts may vary depending on the program chosen. Most programs charge a fee for account administration and investment management, as well as fees for transferring funds and withdrawals. However, some states offer plans with no investment fees,” Dana Ronald, president of Tax Crisis Institute, says.
Using an ABLE Account
Once you’ve set up an ABLE account, accessing your funds is relatively simple. You can either transfer them to your bank account, request a paper check or even get a debit card to use for purchases, depending on the account.
Note that to maintain eligibility for SSI, funds in your ABLE account cannot exceed $100,000.
ABLE Contribution Limits
As of 2023, an individual can contribute up to $17,000 per year to their ABLE account.
If you have a disability and are employed, you might be able to contribute more under certain circumstances, Roberts says.
Per the IRS, eligible employed ABLE account beneficiaries can contribute the lesser of:
— The designated beneficiary’s compensation for the tax year, or
— The poverty line amount for a one-person household (Community Services Block Grant Act — 42 U.S.C. 9902).
— For 2023, the allowable amount is $13,590 in the continental U.S., $16,990 in Alaska and $15,630 in Hawaii.
Friends, family and employers can also contribute additional funds to an ABLE account as long as the total yearly contribution complies with established limits.
Eligible Purchases
“Eligible expenses for ABLE accounts can include education, housing, transportation, employment training, assistive technology and more. Generally speaking, expenses must be related to the disability to qualify,” Ronald says.
For instance, Lorz is planning to use funds from her daughter’s ABLE account to help purchase a wheelchair-accessible vehicle.
If you withdraw ABLE funds for an ineligible expense, keep in mind that amount might be subject to a tax penalty of 10% — on top of your regular income tax liability.
[Read: How to File Taxes for Free.]
ABLE Account Tax Incentives
ABLE accounts are tax advantaged, which means they come with specific benefits that reduce or eliminate taxes. According to Ronald, tax incentives for ABLE accounts work similarly to other investment accounts.
“Earnings grow tax free and contributions may be eligible for state income tax deductions. In addition, contributions are not subject to the ‘use it or lose it’ rule that applies to other accounts,” Ronald says.
While all ABLE accounts allow after-tax contributions to grow tax free, state income tax deductions or tax credits vary by location.
Currently, 20 states and the District of Columbia offer this benefit, Roberts says. For instance, Michigan offers a $5,000 tax deduction for single filers and $10,000 for joint filers.
[Read: Tax Write-Offs You Shouldn’t Overlook.]
ABLE Account Alternatives
The most common alternative to an ABLE account is a special needs trust, which allows account holders to save money for additional disability-related expenses for a friend or family member without jeopardizing that person’s SSI and Medicaid eligibility.
Special needs trusts can be more flexible than ABLE accounts, most notably because they don’t impose an age restriction regarding the qualifying disability’s onset.
According to Roberts, ABLE accounts and special needs trusts actually complement one another. While special needs trusts might be more flexible, ABLE accounts give owners more immediate access to their funds.
Should You Open an ABLE Account?
ABLE accounts can make a big difference in a disabled persons life, giving them access to funds in the case of an emergency while ensuring they remain qualified for government programs like SSI and Medicaid.
In addition to tax benefits, these accounts offer peace of mind to those juggling disability-related expenses. Roberts has seen her brother, who has a developmental disability, become more financially independent and confident since having access to one.
“I am so grateful that my employer, Gift of College Inc., matches up to $1,000 a year of my contributions into my brother’s ABLE account,” she says.
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What Is an ABLE Account? originally appeared on usnews.com
Update 02/15/23: This story was previously published at an earlier date and has been updated with new information.
