ABLE Savings Accounts for People with Special Needs

ABLE accounts give people with disabilities a way to save money without jeopardizing their qualifications for government disability benefits.

What is an ABLE Account?

Signed into law in 2014, the Achieving a Better Life Experience (ABLE) act creates a type of bank account for certain persons with disabilities. The money kept in these accounts won't count against a person's ability to qualify for Supplemental Security Income (SSI) or Medicaid. A person with a disability can own and control his or her own ABLE account, and any income earned in the account will not be subject to income tax.

ABLE accounts also come with significant limitations, including the following:

• Disability qualifications. To qualify to use an ABLE account, an individual must have a disabling condition that began before age 26.

  This requirement can be met by being entitled to disability benefits through SSI (Supplemental Security Income) or SSDI (Social Security Disability Insurance) or having a written diagnosis from a physician indicating that individual has a physical or mental impairment that:

  • is medically provable
  • results in severe limitations in functioning, and
  • is expected to last at least a year or result in death.

  Individuals over 26 can have an ABLE account as long as their disability began before they turned 26

• Only one account. Each person can only have one ABLE account.
• Anyone can put money in the account. Anyone can contribute money to an ABLE account, including the owner with a disability.
• Contributions are capped annually. The limit for 2022 is $16,000. This limit is equal to the annual personal gift tax exclusion, so it will rise every few years. Also, to be clear, this is per account, not per donor. The owner of the account must keep track of all contributions to ensure that they do not exceed $16,000 for the calendar year. Some states allow an additional amount to be added to the account for disabled individuals who are working, up to the annual federal poverty guideline ($12,880 in 2022) or their annual salary before taxes, whichever is less.
• For many, the account cannot exceed $100,000. For those who qualify for SSI, the balance of an ABLE account cannot exceed $100,000. For those who do not qualify for SSI, the account can reach the limit allowed for 529 plans in that state.
• Funds must be used for Qualified Disability Expenses (QDE). QDE are expenses that are "related to the blindness or disability" of the account holder. Thankfully, this is a fairly broad definition and can include expenses for housing, education, transportation, employment training, health and wellness, financial management, assistive technology, personal support services, legal fees, basic living expenses, funeral and burial expenses, and more. (If you use funds in the account for housing-related expenses, you must use the funds in the same month you received them to avoid them counting as a resource that affects your SSI eligibility).
• Account funds are not taxed if used properly. The income earned from the funds in ABLE accounts is not taxed. Contributions are made with post-tax dollars, and distributions made for QDE are tax-free.
• Unused funds pay Medicaid. In most states, if the account owner dies with funds in an ABLE account, those funds must be used (in this order): to pay any outstanding QDE bills including funeral expenses, to provide payback to Medicaid for all Medicaid benefits received, and then to be distributed to the account holder's legal beneficiaries. Some states protect ABLE accounts from Medicaid recovery.

The IRS and the Department of the Treasury have released proposed regulations that provide rules about how the ABLE act can be implemented by states or state agencies.

You can learn more about ABLE accounts and tax effects on the IRS website.

Read more about the state-specific laws for ABLE accounts.

Special Needs Trust: Another Option for People With Disabilities

Special needs trusts are another useful option for people who receive disability benefits and want to protect and plan for their financial future. These trusts are designed to 1) provide for people with disabilities by giving them a source of funds that won't count against their eligibility for benefits and 2) name a trustee and a backup trustee to manage the trust for the benefit of the person with disabilities. These types of trusts are subject to strict federal rules. Read more about Special Needs Trusts on Nolo.com.