ABLE accounts: How tax reform improved accounts to pay for disability expenses

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In a Nutshell

An ABLE account allows eligible taxpayers with disabilities to build tax-advantaged savings without affecting their access to benefits. The Tax Cuts and Jobs Act of 2017 increased how much working account-holders can contribute each year, allows them to claim a tax credit for contributions, and allows funds to be rolled over from a qualified 529 plan to an ABLE account.

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Everyone should have the opportunity to save, invest and create financial security for themselves and their families.

Yet life circumstances, like a disability, can drain your financial resources.

In fact, disabled people worldwide face significantly higher costs of living, according to a 2017 review of studies published in the Disability and Health Journal. In the U.S., people with disabilities experience extra costs that range from $1,170 to $6,952 per year, the review found.

If you don’t have a disability now, it doesn’t mean you never will. More than 1 in 4 workers turning 21 in 2018 can expect to experience a disability — either temporary or permanent — before reaching the normal retirement age, according to the Social Security Administration.

In the U.S., eligible people with disabilities have help with the financial burden in the form of Achieving a Better Life Experience, or ABLE, accounts — tax-advantaged accounts that allow savings and investments to grow tax-free, provided account-holders spend the proceeds on qualified disability-related expenses. Last year’s tax reform bill made three significant changes to ABLE accounts that could help beneficiaries increase their savings while remaining eligible for federal assistance programs.

Let’s take a look at how ABLE accounts work and how tax reform has affected these tax-advantaged accounts.


ABLE account basics and background

ABLE accounts work similarly to 529 college savings plans, and like some 529s, are state-run programs. The money you put into an ABLE account is not tax deductible, so contributing to one doesn’t lower your income (or your tax liability). However, some states may allow you to take a state income tax deduction for certain ABLE account contributions.

Anyone can contribute to your ABLE account, but there are limits on how much you can put into the account each year, and a limit on the total balance.

As long as you don’t withdraw more money than you need to pay qualified disability expenses, you don’t pay taxes on the money your ABLE account earns. And qualified withdrawals (called distributions) don’t count as taxable income. If you withdraw more in a year than you need to pay for your qualified disability expenses, the excess is considered earnings and possibly taxable income.

It’s important to note that in order to qualify for an ABLE account, your disability must have occurred before you were 26 years old.

“I consider the ABLE Act to be the most significant law for people with disabilities since Congress passed the [Americans with Disabilities Act] in 1990,” says Michael Morris, executive director of the National Disability Institute, a nonprofit advocacy organization in Washington, D.C. “It allows people with disabilities who have been depending on different resource-tested benefits like healthcare, Social Security and housing assistance to no longer be held back from becoming savers.”

To qualify for some benefits programs, such as supplemental security income, a single person with disabilities generally can’t have more than $2,000 in cash, savings, retirement accounts and other eligible assets (couples can have up to $3,000). A big benefit of using an ABLE account is that the first $100,000 doesn’t count toward that limit.

You can generally only be the beneficiary of one ABLE account at a time, and the annual gift tax exclusion amount is the total amount that you and others can contribute to the ABLE account each year. In 2017, the gift tax exclusion was $14,000. It increased to $15,000 in 2018. However, that wasn’t the only recent change to ABLE accounts.

Three big changes thanks to tax reform

The Tax Cuts and Jobs Act of 2017 affected the taxes of virtually every American. In addition to significantly increasing the standard deduction, lowering tax brackets and making changes in deductions, the tax measure also made three important changes to how ABLE accounts work:

1. Working account beneficiaries can contribute additional funds

ABLE account beneficiaries can now make additional contributions to their accounts. To qualify, you must be working and your employer can’t contribute to a workplace retirement plan for you.

If you qualify, you can contribute the greater of your compensation or the federal poverty line amount for one-person households, which is $12,140 for the continental U.S. in 2018. There are higher limits for residents of Hawaii and Alaska.

This means that if you work, have no employer-sponsored retirement plan and make less than $12,140, you can put all your wages into your ABLE account.

2. Contributions can count toward the Saver’s Credit

The contributions that ABLE account beneficiaries make into their accounts can now qualify them for the Saver’s Credit, which is intended to give low- and moderate-income taxpayers an additional incentive to save for retirement. To qualify for the Saver’s Credit, you must be at least 18 years old, not be a full-time student, and can’t be claimed as a dependent on someone else’s taxes.

Up to $2,000 of your ABLE contributions can count toward the credit, which could be worth up to $1,000. The eligible contribution amount increases to $4,000 if you’re married and claim married filing jointly as your filing status.

Learn how to choose your filing status

3. You can transfer funds from a 529 plan to an ABLE account

ABLE accounts are formally called 529A ABLE accounts, and they’re similar to 529 college savings plan accounts.

You can invest the money in your ABLE account, and you don’t have to pay federal income tax on money that you spend on eligible expenses.

“The great advantage of ABLE is that the tax advantage isn’t just limited to college costs,” Morris says. “It covers a comprehensive view of the costs of living with a disability, everything from continued education to healthcare costs not covered by insurance.”

With the recent change, you can also roll over funds from a 529 college savings plan to an ABLE account without paying a penalty for making ineligible withdrawals from the 529 plan. However, the rolled over amount is included in the annual contribution amount for the ABLE account.

To qualify for the rollover, the beneficiary of the ABLE account must also be the beneficiary of the 529 plan. Or the ABLE account beneficiary must be a sibling (including adopted or half-siblings) of the 529 plan beneficiary.

This benefit goes away after Dec. 31, 2025, unless Congress acts to extend it before then.

Other things to know about ABLE accounts

You can open an ABLE account for yourself. A parent, legal guardian or someone you’ve given power of attorney to may be able to open an account on your behalf. The person with disabilities will always be the account owner, but others may be able to get authority to manage the account and money that’s in it.

Once you open an ABLE account, anyone can contribute as long as the total contributions don’t exceed the annual limit.

Before opening an ABLE account, verify that you (or the beneficiary) are eligible, and then compare the different state programs to find the one that suits your situation best.

Qualifying for an ABLE account

There are two main tests to determine if you’re eligible for an ABLE account.

The first is that your disability must have begun before you turned 26 years old.

If you meet the age requirement and currently receive supplemental security income or Social Security disability insurance, you’re eligible to be an ABLE account beneficiary. If you don’t receive SSI or SSDI, you could be eligible if you receive a letter of certification from a licensed physician and you meet the Social Security Administration’s definition for having significant functional limitations.

“As long as you qualify for a part of the year, you’re qualified for the whole year,” says Christopher Rodriguez, director of the ABLE National Resource Center, which was founded by the National Disability Institute.

If you’re no longer qualified, perhaps because your condition goes into remission, then, starting on the first day of the next tax year, you can’t make any more contributions or qualified withdrawals.

You could still withdraw your contributions without paying a penalty or declaring them as income, since the contributions you made weren’t tax deductible. However, if you withdraw any of the earnings in the account, you may have to include that as income for the year.

Choosing an ABLE account

States create and manage ABLE programs, and all the ABLE programs serve a similar function. But you may want to consider the differences between different states’ ABLE accounts.

“Some programs have debit cards or reloadable cards, and some have more investment options than others,” Rodriguez says. “They differ, but I wouldn’t say any program is universally better than another. It depends on the needs of the beneficiary.”

The ABLE National Resource Center has a state comparison tool you can use to get a side-by-side look at up to three ABLE accounts at a time. Once you’re ready to open an account, you’ll need to go to the state’s ABLE account website to submit your application.

Drawbacks of ABLE accounts

While ABLE accounts can provide a variety of benefits, account-holders should be aware of at least one drawback.

“A [big] disadvantage is called the Medicaid payback,” Morris says.

If the beneficiary of the account dies and there isn’t an ABLE-eligible sibling that you can transfer the account to, the state where you live may be able to take funds as repayment for the services it provided to the beneficiary while the person had the ABLE account.

However, Morris points out that only some states have a Medicaid payback provision. Depending on where you live, this may not be a drawback at all.


Bottom line

An ABLE account isn’t the only way to help support a person with disabilities. Some individuals or families set up a special-needs trust, which you may be able to use to give money to a person with disabilities without jeopardizing access to disability benefits.

“If you have a trust, you should probably have an ABLE account, too. The ABLE account can pay for things the trust cannot,” Morris says. “If you can’t afford a trust, you should still have an ABLE account.”

Either way, an ABLE account could provide financial flexibility and benefits if you, or someone you care for, has a disability that occurred before age 26. The recent changes could make an ABLE account even more worthwhile, as you can contribute more to your account, receive a tax benefit from those contributions, and have more flexibility if you had already been saving for a child’s education.