Congress passed the ABLE Act, creating tax-exempt savings accounts for the disabled
Eileen St. Pierre, The Everyday Financial Planner
On December 16, 2014, Congress passed the ABLE (Achieving a Better Life Experience) Act. It wasn’t front page news, but it was an important step for families needing to create a safety-net for their disabled children once they reach adulthood.
What is an ABLE Account?
It is a tax-exempt savings account. While contributions are not tax-deductible, income earned is not taxed. Anyone can contribute to a disabled person’s ABLE account. Advocates of this legislation had to compromise on who would be eligible for these accounts – disability must be documented before the age of 26.
- Individuals over age 26 can still set up ABLE accounts as long as their disabilities occurred before age 26.
- Only one account is allowed per beneficiary.
- Withdrawals must be used for qualified disability expenses.
- The Treasury Department still needs to write the policies and regulations for these accounts, including how disability will be defined. Applications will then be accepted after the regulations are written (before the end of 2015).
How much can be contributed to an ABLE account?
The annual contribution limit is $14,000, and it will be adjusted for inflation. It is no coincidence that this is the same as the annual limit for cash gifts to avoid the gift tax.
- States will be responsible for setting up and running ABLE programs so the total contribution limit will be subject to that state’s rules for 529 college savings plans ($300,000 in most states).
- These accounts will not affect eligibility for SSI, Medicaid, and other public benefits unless the balance exceeds $100,000. At this point, the beneficiary will no longer receive SSI but he/she would still be eligible for Medicaid.
- States will be allowed to recoup some of their Medicaid costs upon the death of the beneficiary. How that will happen is not clear at this time.
An ABLE account is a cheaper option than a Special Needs Trust.
Parents of children with disabilities have struggled with how their adult children will be taken care of after they are gone. Many have set up Special Needs Trusts with specific care instructions – funding of these trusts would not disqualify their adult children from public benefit programs. However, these trusts are expensive to set up. Now families have a cheaper option.
- It appears that ABLE accounts will have the same investment choices as that state’s 529 plan. I expect states to have the same investment companies administer their ABLE programs.
- Changes in investment allocations can be made no more than two times per year.
- Families will still need to choose someone to withdraw the money when needed and to make sure the beneficiary receives appropriate care.
These accounts are a great start. The National Disability Institute (NDI) estimates that 5.8 million people would be eligible to set up ABLE accounts, about 10% of the total disabled population. I would love to see these accounts available to anyone who wishes to save money for long-term care expenses. I’d be the first person to sign up.