New Savings Accounts (ABLE) for Disabled People

Being blind or disabled can be expensive. One big problem disabled people have saving money is that it can result in loss of their eligibility to receive Social Security disability (SSI), SNAP (food stamps), or Medicaid benefits, which are usually available only to people with financial assets of $2,000 or less. Fortunately, a relatively new type of tax-advantaged savings account has been established by Congress to help disabled individuals and their families: the ABLE Account (named for the Achieving a Better Life Experience (ABLE) Act). ABLE accounts give disabled people the ability to save money to help pay for their expenses without jeopardizing their eligibility to receive government assistance. ABLE accounts were authorized by Congress back in 2014, but are just gaining popularity now. Recent legislation allows more money to be contributed to ABLE accounts and enables the disabled to earn a tax credit as well.

What Is an ABLE Account?

ABLE Accounts are much like the tax-free 529 accounts used to save for college education. The accounts are run by the states. Disabled individuals or their families may establish a single ABLE account, and the individual, family, friends (or anyone else) may contribute a total of $15,000 into the account each year (this amount is the same as the annual gift tax exclusion, which is adjusted for inflation). In addition, disabled ABLE account beneficiaries who work may contribute their compensation to their accounts up to the federal poverty level for a single individual—currently $12,140. This encourages the disabled to work by permitting them to save all or part of their earnings in an ABLE account.

Any amounts that exceed the annual limits must be returned. There is also a total limit on how much may be contributed over time, which is the same as the state's section 529 qualified tuition program limit. This limit is $300,000 to $500,000 in most states.

Contributions to ABLE accounts are not tax deductible, but are excluded from the federal gift tax. The income the money in the account earns is not taxed. Withdrawals from the account are also tax-free so long as the money is used for "qualified disability expenses." These include expenses for maintaining or improving health, independence, or quality of life—for example, education, housing, transportation, employment training and support, assistive technology, personal support services (such as home health aides), health care expenses, financial management and administrative services, legal fees, and funeral expenses. Withdrawals made for other nonqualified purposes are subject to regular income tax plus a 10% penalty tax.

The money in an ABLE account is not counted by the government when determining eligibility for government benefits. However, disabled individuals who accrue more than $100,000 in an ABLE account will lose their eligibility to receive SSI cash benefits, but can continue to receive Medicaid.

When an ABLE account beneficiary dies, the state he or she lived in may file a claim to all or part of the money in the account equal to the amount in the state spent on the beneficiary through the state Medicaid program. This is commonly known as the "Medicaid Pay-Back."

Starting in 2018, there is an additional benefit for a disabled person to contribute money to an ABLE account: the disabled beneficiary may be eligible to collect the saver's tax credit. This is a credit the IRS pays to lower-income taxpayers as a reward for saving money. In the past, it applied only to contributions to retirement accounts, like IRAs, but it has been extended to ABLE accounts as well. The amount of the credit is 50%, 20% or 10% of the ABLE account contributions, depending on the beneficiary's adjusted gross income. The maximum credit amount is $2,000 ($4,000 if the beneficiary is married, filing jointly). Thus, for example, a beneficiary who contributes $2,000 to his or her ABLE account could be entitled to a $1,000 tax credit. To qualify, the beneficiary must be over 18 years old, not a full-time student, and not claimed as a dependent on another person's tax return. The credit is nonrefundable, meaning you are paid the full amount even if you owe no income taxes.

Finally, if an ABLE account beneficiary also has a 529 College Savings account, the money in the 529 account may be transferred to an ABLE account without incurring any tax or penalty. Such transfers, also called rollovers, apply toward the $15,000 annual contribution limit.

Who May Establish an ABLE Account?

ABLE accounts are only available to people who are (1) blind, or (2) have a physical or mental impairment resulting in marked and severe functional limitations which can be expected to result in death or have lasted or are expected to last for at least 12 months. Moreover, the blindness or disability must have occurred before the person reached age 26. People who became blind or disabled after age 26 are not eligible to open ABLE accounts. This eliminates the great majority of the 58 million Americans who are blind or disabled—perhaps no more than 10% are eligible. This was done by Congress on purpose to lower the cost of the program. People over age 26 may open ABLE Accounts provided they can prove they became disabled before they were 26.

Anyone who started receiving disability benefits (SSI or SSDI) before age 26 is automatically eligible to open an ABLE account. Others can open an ABLE account by certifying, under penalty of perjury, that they meet the necessary requirements. This means they have a signed physician's diagnosis and will provide it to the program or the IRS upon request. However, eligible individuals with disabilities do not need to provide the written diagnosis when opening the ABLE account and ABLE programs do not need to obtain or evaluate their medical records.

A disabled person's parent, legal guardian, or agent with power of attorney, may establish an ABLE account on his or her behalf. However, only the designated blind or disabled beneficiary can have any interest in the ABLE account during his or her lifetime.

How to Establish an ABLE Account

Each state is responsible for establishing and operating its own ABLE account program. Money placed in an ABLE account is invested by the state. The account holders have only limited choices about how aggressively or conservatively the money should be invested.

States are not required to participate in the ABLE account program. Most states are participating, but some have chosen not to do so (you can find a list of states that have established ABLE programs at the ABLE National Resource Center website). However, you don't have to establish an ABLE account in the state in which you live. You can do so in any state with an ABLE account program that is open to out-of-state residents (not all are). Indeed, you should compare all the ABLE programs available to see which program is best suited for you. The ABLE National Resource Center has an online tool you can use to compare state ABLE programs.